Annual Report on Form 10-K

Principal Occupation During Last Five Years

Director
Since

Chong Sup Park

Managing Director at H&Q Asia Pacific since November 2002. Dr. Park served as the Chairman and Chief Executive Officer of Hynix Semiconductor Inc. (formerly Hyundai Electronics Industries Co. Ltd.) from April 2000 to May 2002. He served as President and Chief Executive Officer of Hyundai Electronics America, Inc. from September 1996 to October 1999 and Chairman from November 1999 to May 2002. Dr. Park is Chairman of the Board and serves on the audit committee of Maxtor Corporation and is a director of Dot Hill Systems Corporation. Dr. Park holds a B.A. in Management from Yonsei University, an M.A. in Management from Seoul National University, an M.B.A. from the University of Chicago and a Doctorate in Management from Nova Southeastern University.

Paul C. Schorr, IV

Managing Director of Citigroup Venture Capital Equity Partners since January 2000. Mr. Schorr joined Citicorp Venture Capital in 1996. From 1993 to 1996, he was an associate and then an engagement manager with McKinsey & Company, Inc. Mr. Schorr is a director of Worldspan, Fairchild Semiconductor International, Inc. and AMI Semiconductor.

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OsFVJ3HRF9habpsvQbC2uCKwtf67rBZbWFQnXvMETSLB+aUYf6jBb/olWhVliRHf AaR8RBiQwkDOtF9jVZXutA== 0001193125-04-040704.txt : 20040312 0001193125-04-040704.hdr.sgml : 20040312 20040312172012 ACCESSION NUMBER: 0001193125-04-040704 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHIPPAC INC CENTRAL INDEX KEY: 0001093779 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770463048 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-31173 FILM NUMBER: 04666999 BUSINESS ADDRESS: STREET 1: 47400 KATO ROAD CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5109798000 MAIL ADDRESS: STREET 1: 47400 KATO ROAD CITY: FREMONT STATE: CA ZIP: 94538 10-K 1 d10k.htm ANNUAL REPORT ON FORM 10-K Annual Report on Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

¨	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 000-31173

ChipPAC, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or Other Jurisdiction of

Incorporation or Organization)

77-0463048

(I.R.S. Employer

Identification No.)

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:

Title of Each Class

Name of Each Exchange on

Which Registered

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


		Page
PART I		3

Item 1.	BUSINESS	3

Item 2.	PROPERTIES	13

Item 3.	LEGAL PROCEEDINGS	14

Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	14

PART II		15

Item 5.	MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	15

Item 6.	SELECTED FINANCIAL DATA	16

Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17

Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	28

Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	30

Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	69

Item 9A.	CONTROLS AND PROCEDURES	69

PART III		69

Item 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	69

Item 11.	EXECUTIVE COMPENSATION	73

Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	78

Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	80

Item 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	81

PART IV		81

Item 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K	81

SIGNATURES		87

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,

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:

•

High End Technology Expertise—We are one of the world’s largest providers of outsourced advanced packaging, which accounted for approximately 68.5% and 60.3% of our packaging revenue for the years ended December 31, 2003 and 2002, respectively. Our substrate based packages are used for most high-end applications such as computing, wireline and wireless communications devices, gaming, and stacked die packages for portable applications. Our advanced package portfolio also includes next generation flip-chip technology for system on a chip, or SOC, which is used in network servers and telecom switching devices, as well as single and multi-die CSP packaging for digital signal processors, or DSPs, and other chipsets for wireless handset, wireless LAN, and other portable handheld equipment such as PDAs. In addition, we have critical expertise for testing radio frequency, or RF, devices. We believe that our advanced technology expertise and our commitment to research and development will enable us to continue to drive the development of solutions for next generation semiconductor packages.

•

Leader in Growing Power Discrete, Power Management and Analog Segment—We are a leader in high-volume semiconductor assembly and test services for discrete, analog, RF and mixed-signal technologies, for small signal and power applications. Power products manage the electricity requirements for multiple components, ensuring an accurate and efficient flow of voltage so electronic devices run longer and more efficiently. As electronics become increasingly more complex, portable and performance-driven, the demand for power regulation and management increases significantly. A broad and fast-growing range of end markets, including portable devices, household appliances, computers, automotive systems and telecommunications, will continue to drive power semiconductor usage and the demand for our power products.

•

Strategic Geographic Diversification—We are strategically located to take advantage of industry outsourcing trends. Our Shanghai, China facility, which was established in 1994, is the largest packaging and test provider in China. We provide local content for products sold into the Chinese market, including cellular telephones, computers and portable devices. Our high-volume packaging site for advanced BGA packages is in Ichon, South Korea, which is significant for its proximity to large semiconductor customers and to an available pool of highly-skilled research and development and technical staff. Our Malaysian facility in Kuala Lumpur positions us to benefit from the growth in fabless manufacturing taking place in Southeast Asia. Our headquarters in Silicon Valley and state-of-the-art research development and design facilities in Arizona and South Korea are located near our customers and provide us with the ability to work on a 24-hour-basis with our customers in the design process and in supply chain management.

•

New and Diversifying Customer Base—In 2003, we continued to diversify and broaden our customer base to over 90 customers worldwide. Our customers include some of the largest companies in the semiconductor industry. Our largest customer accounted for 15.9% of our total sales in 2003 versus 16.6% of total sales in 2002.

•

Among the Leaders in Growing Test Services—Through our long-term partnerships and existing customer base, we are well positioned to capitalize on the growth of outsourced testing by semiconductor producers. This growth in outsourced testing is driven by the increasing demand for RF, mixed-signal and high performance logic devices that require greater capital expenditures on testing equipment. We have made significant capital expenditures on testing equipment that provides us with the capability to test mixed-signal, analog, digital logic, memory, power and RF devices. By increasing

our emphasis on our test business and adding capacity, we have increased our test revenue over the past several years, and we expect this growth to continue. Our test business revenue grew to $59.5 million in 2003 from $56.2 million in 2002.

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,

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

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:

•

smaller size;

•

greater pin count, or number of connections to the printed circuit board;

•

greater reliability;

•

better electrical signal integrity; and higher power dissipation

•

easier attachment to a printed circuit board.

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:

•

Ball Grid Array (BGA). Standard BGA packaging has a grid array of balls on the underside of the integrated circuit, and is used in high-performance applications, like personal computer chipsets, graphic controllers and DSPs. A BGA package generally has greater than 100 pins. BGA packages have better thermal and electrical performance than leaded packages. They also feature more advanced surface mount technology, allowing for easier handling in the packaging process.

•

Chip-Scale. Chip-scale BGA, LFCSP, and BCC packaging includes all packages where the package is less than 1.2 times the size of the silicon die. Chip-scale BGA is a substrate-based package that is designed for memory devices and other medium pin count semiconductors and requires dense ball arrays in very small package sizes, like wireless telephones and personal digital assistants, video cameras, digital cameras and pagers. We also include LFCSP and BCC packages in this category. While they use a metal lattice instead of a laminate substrate, they are a chip-scale package serving these markets.

•

System-in-Package. System-in-Package, or SiP, is a family of chip-scale-packages that contain several semiconductor die in one package, either stacked on top of each other or side by side. This technology allows greater functionality in the same package footprint and thickness without significant cost increase. These packages are used in wireless handsets, consumer products and mobile computing applications.

•

Flip-Chip BGA. Flip-chip BGA packaging in which the silicon die is directly attached to the substrate using gold bumps instead of solder balls provides the most dense interconnect at the lowest cost and highest performance. Flip-chip BGA technology is used in a wide array of applications ranging from consumer products to highly sophisticated application specific integrated circuits, referred to as ASIC, computer chipsets, graphics and memory packages. While we believe that flip-chip BGA represents the next generation of BGA packaging technology, we believe that standard BGA and chip-scale BGA packaging will experience long life cycles as have many of our leaded packaging solutions.

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).


Year Ended December 31, 2003		Year Ended December 31, 2002			Year Ended December 31, 2001				Package Types	Application
Revenue	% of Total Assembly Revenue	Revenue		% of Total Assembly Revenue	Revenue		% of Total Assembly Revenue		Package Types	Application
(in millions)		(in millions)			(in millions)

Leadframe
$ 103.6	28.0%	$	109.0	35.4%	$	104.9	37.0%	Traditional:	PDIP, PLCC, SOIC, SSOP, TSOP, TSSOP, SIP, DPAK, D2PAK, and TO220	Telecommunications automobiles, household, and appliances, and desktop and notebook computers

$ 12.8	3.5%	$	13.3	4.3%	$	27.2	9.6%	Advanced:	MQFP, TQFP, LQFP, and iQUAD^®	Personal computers and telecommunications

Advanced
$ 132.6	35.9%	$	112.3	36.6%	$	110.9	39.2%	BGA:	PBGA, M2BGA^® TBGA, EBGA, and Flip PAC	Personal computer chipsets, graphic controllers high-end network servers products, application specific integrated circuits, microprocessors and memory packages.

$ 120.7	32.6%	$	72.9	23.7%	$	40.2	14.2%	Chip Scale Packages:	EconoCSP^™, M2CSP^®, Micro BGA^™, LFCSP^™, BCC, and Flip Chip CSP	Wireless telephones, personal digital assistants, video cameras, wireless pagers, and wireless LAN

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.

Other Services

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

•

Design and Characterization Services. We offer design and characterization services at our Arizona, South Korea, Malaysia and China facilities. Our design engineers at these facilities select, design and develop the appropriate package, leadframe or substrate for that device by simulating the semiconductor’s performance and end-use environment.

•

Dry Pack Services. In order to prevent the failure of any semiconductors due to exposure to moisture during shipping, we “dry pack” many of our packaged integrated circuits in specially sealed, environmentally secure containers.

•

Tape and Reel Services. Many electronic assembly lines utilize “tape and reel” methods in which semiconductors are placed into a pocket tape to enable faster attachment to the printed circuit board. We offer a service in which we ship packaged and tested devices on a tape and reel mechanism rather than in a tray, to facilitate the assembly process.

•

Warehousing and Drop Shipment. In order to enable semiconductor companies to improve their time-to-market and reduce supply chain and handling costs, we offer warehousing and drop shipment services in which we ship packaged semiconductor devices directly to our customers’ customers.

•

Wafer Probe. We offer a wafer sort service where an electrical test is performed on the die while still in wafer form. This process identifies suitable die on each wafer which can be assembled into a final package.

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:


	Year Ended December 31,
	2003		2002		2001
United States of America	86	%	89	%	92	%
Asia	12		10		6
Europe	2		1		2

Total	100	%	100	%	100	%

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-

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:

•

United States of America:

•

Chandler, Arizona

•

Fremont, California

•

Longmont, Colorado

•

Palm Bay, Florida

•

Northborough, Massachusetts

•

Austin, Texas

•

Dallas, Texas

•

Shanghai, China,

•

Tokyo, Japan,

•

Kuala Lumpur, Malaysia,

•

Kampen, Netherlands,

•

Singapore

•

Ichon, South Korea,

•

Seoul, South Korea, and

•

HsinChu City, Taiwan

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.

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 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^TMcapability, provides the shortest time-to-market with predictable performance.

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


•	M²CSP^®	Molded multi-die chip scale package family with the following chip-stack combinations in package profile thickness ranging from 1.0 to 1.4mm:

	ü	Two-chip stack, same chip size

	ü	Three-chip stack, “pyramid stack”

	ü	Three-chip stack with the two chip same size

	ü	Three-chip stack with three chip same size

	ü	Four-chip stack, “pyramid stack”

	ü	Four-chip stack with two chips same size

	ü	Four-chip stack with three chips same size


•	LFCSP^™	Lead frame chip scale package

•	BCC, BCC+, BCC++	Bumped Chip Carrier package family

•	G4^™	“Gigabit-Green-Gold-to-Gold” flip chip interconnection package family of CSPs and BGAs

•	TEBGA+	Thermally enhanced ball grid array family with integrated passive components

•	TEBGA-II	Higher thermal performance TEBGA

•	FC-MPM	Flip Chip Multi Package Module family module

•	FC-CSP	Lead Free Flip Chip-Chip Scale Package

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:

•

Advanced Semiconductor Engineering, Inc.—Taiwan

•

Amkor Technology, Inc.—South Korea, Japan, Taiwan and the Philippines

•

ASE Test Limited—South Korea, Taiwan and Malaysia

•

Siliconware Precision Industries Co., Ltd.—Taiwan

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.

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:


Facility Location	Leased/Owned	Sq. Ft.	Functions/Services	Principal Packaging or Service Provided
Fremont, California	Leased	56,320	Executive Offices, Research and Development, Sales, Marketing and Administration	Sales, Marketing, Administration and Design Review Services

Chandler, Arizona	Leased	5,357	Research and Development, Sales and Marketing	Design and Characterization Services

Shanghai, China	Owned(1)	442,000	Packaging and Test Services, Research and Development, Warehousing Services Distribution Services	Leaded IC, Chip-Scale, BGA, Packaging and Test

Ichon, South Korea	Leased	474,000	Packaging and Test Services, Research and Development, Warehousing Services Distribution Services	Advanced Leaded, BGA, Chip-Scale, Flip-Chip Packaging and Test

Kuala Lumpur, Malaysia	Owned(1)	483,328	Packaging and Test Services, Research and Development, Warehousing Services	Discrete Power, Chip-Scale, Test and Distribution Services

(1)	Building and improvements are owned by ChipPAC but upon the termination of the existing long-term land lease revert to the lessor in the years 2044 and 2086 for our facilities in Shanghai, China and Kuala Lumpur, Malaysia, respectively.

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.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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.


	High		Low
2003
Fourth Quarter	$	9.00	$	5.41
Third Quarter		9.50		5.00
Second Quarter		7.60		3.29
First Quarter		3.75		2.22

2002
Fourth Quarter		5.02		0.99
Third Quarter		6.75		1.89
Second Quarter		12.55		4.66
First Quarter		9.97		5.23

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.


Plan Category	Shares to Be Issued Upon Exercise of Outstanding Options	Weighted Average Exercise Price of Outstanding Options		Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans¹
Equity Compensation Plans Approved by Stockholders	8,154,022	$	3.92	13,067,547
Option Plans	7,440,991	$	3.81	6,721,239
Employee Stock Purchase Plan	713,031	$	5.11	6,346,308
Equity Compensation Plans Not Approved by Stockholders	None			None

1	The number of shares available for issuance under our 2000 Equity Incentive Plan increases each year by one percent of the total shares of our outstanding common stock pursuant to the terms of the plan.

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

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)


	For the Years Ended December 31,
	2003			2002			2001			2000			1999
Statement of Operations Data:
Revenue	$	429,189		$	363,666		$	328,701		$	494,411		$	375,530
Gross profit		63,890			55,601			31,113			109,144			58,042
Operating income (loss)		369			7,993			(55,229	)		62,330			12,619
Net income (loss)		(28,781	)		(28,855	)		(93,736	)		12,056			(7,308	)
Net income (loss) available to Common stockholders		(28,781	)		(28,855	)		(93,736	)		2,869			(11,528	)

Net income (loss) per share available to Common stockholders:
Basic	$	(0.30	)	$	(0.33	)	$	(1.36	)	$	0.05		$	(0.30	)
Diluted	$	(0.30	)	$	(0.33	)	$	(1.36	)	$	0.05		$	(0.30	)

Shares use in per share calculation:
Basic		95,554			87,430			68,878			57,067			38,935
Diluted		95,554			87,430			68,878			58,253			38,935

Other Financial Data:
Depreciation and amortization	$	70,090		$	58,949		$	59,909		$	45,049		$	56,701
Debt issuance cost amortization		2,216			2,281			2,112			1,950			774
Acquisition of property and equipment		130,655			78,910			46,392			93,174			57,856

Balance Sheet Data (at period end)
Cash and short-term investments		59,708			44,173			41,872			18,850			32,117
Accounts receivable, less allowance for doubtful accounts		56,728			38,793			32,034			45,904			30,003
Working capital		52,932			34,395			(17,981	)		(16,296	)		10,224
Total assets		579,331			470,204			430,715			469,245			343,429
Total long-term debt, including current portion		365,000			267,887			333,627			290,200			300,000
Mandatorily redeemable preferred stock		—			—			—			—			82,970
Total stockholders’ equity (deficit)	$	95,043		$	115,544		$	(23,226	)	$	65,697		$	(122,886	)

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

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

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:


	Year Ended December 31,
	2003		2002		2001
Substrate	59.0	%	50.9	%	46.0	%
Lead frame	27.1		33.6		40.2
Test and other services	13.9		15.5		13.8

Total	100.0	%	100.0	%	100.0	%

Quarterly Results (Unaudited)

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


	2003												2002
	Q4			Q3			Q2			Q1			Q4			Q3			Q2			Q1
	(in thousands, except per share amount)
Revenue	$	128,357		$	105,420		$	106,844		$	88,568		$	92,708		$	94,659		$	97,086		$	79,213
Gross profit		24,227			13,035			16,587			10,041			12,322			15,960			17,764			9,555
Gross margin		18.9	%		12.4	%		15.5	%		11.3	%		13.3	%		16.9	%		18.3	%		12.1	%
Writedown of impaired assets		—			11,662			—			—			—			—			—			—
Restructuring charge		—			1,957			—			—			(661	)		—			—			—
Net income (loss)	$	3,264		$	(17,919	)	$	(4,462	)	$	(9,664	)	$	(6,983	)	$	(3,179	)	$	(7,148	)	$	(11,545	)
Income (loss) per share
Basic	$	0.03		$	(0.19	)	$	(0.05	)	$	(0.10	)	$	(0.07	)	$	(0.03	)	$	(0.05	)	$	(0.15	)
Diluted		0.03			(0.19	)		(0.05	)		(0.10	)		(0.07	)		(0.03	)		(0.05	)		(0.15	)

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:


	Year Ended December 31,
	2003		2002		2001
Historical Statement of Operations Data:
Revenue	100.0	%	100.0	%	100.0	%
Gross margin	14.9		15.3		9.5
Selling, general & administrative	8.9		10.5		9.5
Research & development	2.7		2.8		4.3
Restructuring/other expenses	3.2		(0.2	)	12.4

Operating income	0.1	%	2.2	%	(16.8	)%

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

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.

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

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.

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.

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)


	Total		Within 1 Year		1 - 3 Years		3 - 5 Years		After 5 Years
On balance sheet commitments:
Senior subordinated notes	$	165,000	$	—	$	—	$	—	$	165,000
Convertible subordinated notes		200,000		—		—		150,000		50,000

Total on balance sheet commitments		365,000		—		—		150,000		215,000

Off balance sheet commitments:
Operating leases		56,721		7,360		13,474		12,634		23,253
Royalty/licensing agreements		1,406		579		579		248		—
Contingent payments to Cirrus Logic		3,500		1,000		2,000		500		—

Total off balance sheet commitments		61,627		8,939		16,053		13,382		23,253

Total commitments	$	426,627	$	8,939	$	16,053	$	163,382	$	238,253

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 12³/4% 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 12³/4% 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 12³/4% notes will choose to exercise such repurchase or “put” right. We can give no assurance that the 12³/4% 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 12³/4% 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

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

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.

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.


Non-current assets	Estimated Fair Value		Initial Excess of Fair Value of Acquired Net Assets Over Cost			Total Additional Purchase Price		Adjusted Fair Value
	(in millions)
Land and buildings	$	27.9	$	(11.1	)	$	5.0	$	21.8
Plant and equipment		93.9		(36.9	)		18.3		75.3
Intellectual property		20.9		(8.2	)		3.1		15.8

	$	142.7	$	(56.2	)	$	26.4	$	112.9

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.

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


	January Offering			May Offering			Totals
Source of funds:
Gross proceeds from issuance of common stock	$	68,554		$	105,000		$	173,554
Less: related issuance costs		(4,768	)		(5,830	)		(10,598	)

Net proceeds from issuance of common stock	$	63,786		$	99,170		$	162,956

Use of funds:
Repayment of senior credit facilities	$	62,438		$	50,000		$	112,438
General corporate purposes		1,348			49,170			50,518

	$	63,786		$	99,170		$	162,956

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.

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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Report of Independent Auditors		31

Consolidated Balance Sheets—December 31, 2003 and 2002		32

Consolidated Statements of Operations for each of the three years in the period ended December 31, 2003		33

Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2003		34

Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2003		35

Notes to Consolidated Financial Statements		37

Financial Statement Schedule:

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

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

ChipPAC, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amount)


	December 31, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	24,722		$	34,173
Short-term investments		34,986			10,000
Accounts receivable, less allowance for doubtful accounts of $574 and $391		56,728			38,793
Inventories (Note 6)		26,060			15,299
Prepaid expenses and other current assets		7,411			5,285

Total current assets		149,907			103,550
Property, plant and equipment, net (Note 6)		397,267			336,397
Intangible assets, net		15,860			17,300
Other assets		16,297			12,957

Total assets	$	579,331		$	470,204

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	69,251		$	39,755
Accrued expenses and other current liabilities (Note 6)		27,724			29,400

Total current liabilities		96,975			69,155
Long-term debt		165,000			217,887
Convertible subordinated notes		200,000			50,000
Other long-term liabilities (Note 15)		22,313			17,618

Total liabilities		484,288			354,660

Commitments and contingencies (Notes 12 and 17)
Stockholders’ equity:
Preferred stock,—par value $0.01 per share; 10,000,000 shares authorized, no shares issued or outstanding at December 31, 2003 and 2002		—			—
Common stock, Class A—par value $0.01 per share; 250,000,000 shares authorized, 97,237,000 and 94,093,000 shares issued and outstanding at December 31, 2003 and 2002		972			941
Common stock, Class B—par value $0.01 per share; 250,000,000 shares authorized, no shares issued or outstanding at December 31, 2003 and 2002		—			—
Additional paid-in capital		284,849			276,916
Receivable from stockholders		(164	)		(480	)
Accumulated other comprehensive income		9,169			9,169
Accumulated deficit		(199,783	)		(171,002	)

Total stockholders’ equity		95,043			115,544

Total liabilities and stockholders’ equity	$	579,331		$	470,204

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

ChipPAC, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amount)


	For the Years Ended December 31,
	2003			2002			2001
Revenue	$	429,189		$	363,666		$	328,701
Cost of revenue		365,299			308,065			297,588

Gross profit		63,890			55,601			31,113

Operating expenses:
Selling, general and administrative		38,241			38,159			31,199
Research and development		11,661			10,110			14,223
Restructuring, write-down of impaired assets and other charges		13,619			(661	)		40,920

Total operating expenses		63,521			47,608			86,342

Operating income (loss)		369			7,993			(55,229	)

Non-operating (income) expenses:
Interest expense		30,887			31,986			37,214
Interest income		(828	)		(626	)		(688	)
Foreign currency (gain) loss		35			1,029			(187	)
Loss from early debt extinguishment		1,182			3,005			—
Gain on sale of building (Note 19)		(3,929	)		—			—
Other income, net		(197	)		(546	)		(410	)

Total non-operating expenses		27,150			34,848			35,929

Loss before income taxes		(26,781	)		(26,855	)		(91,158	)
Provision for income taxes		2,000			2,000			2,578

Net loss	$	(28,781	)	$	(28,855	)	$	(93,736	)

Net loss per share
Basic	$	(0.30	)	$	(0.33	)	$	(1.36	)
Diluted	$	(0.30	)	$	(0.33	)	$	(1.36	)
Shares used in per share calculation:
Basic		95,554			87,430			68,878
Diluted		95,554			87,430			68,878

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

ChipPAC, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)


	Common Stock					Warrants Class A Common Stock			Additional Paid in Capital			Receivable from Stockholders			Accumulated other Comprehensive Income		Accumulated Deficit			Total
	Number of Shares		Amount			Warrants Class A Common Stock			Additional Paid in Capital			Receivable from Stockholders			Accumulated other Comprehensive Income		Accumulated Deficit			Total
Balance as of December 31, 2000	68,438		$	685		$	1,250		$	104,509		$	(1,505	)	$	9,169	$	(48,411	)	$	65,697
Repayment of amount due from stockholders	—			—			—			—			520			—		—			520
Expiration of Intel Warrant	—			—			(1,250	)		1,250			—			—		—			—
Employee stock purchases	922			9			—			4,117			—			—		—			4,126
Common stock repurchased by Company during the year	(63	)		(1	)		—			(18	)		—			—		—			(19	)
Exercise of stock options	107			1			—			185			—			—		—			186
Net loss	—			—			—			—			—			—		(93,736	)		(93,736	)

Balance as of December 31, 2001	69,404		$	694		$	—		$	110,043		$	(985	)	$	9,169	$	(142,147	)	$	(23,226	)
Repayment of amount due from stockholders	—			—			—			—			505			—		—			505
Employee stock purchases	1,092			11			—			3,324			—			—		—			3,335
Common stock repurchased by Company during the year	(71	)		(1	)		—			(23	)		—			—		—			(24	)
Exercise of stock options	242			3			—			850			—			—		—			853
Stock issued at public offerings, net of issuance cost of $10,598	23,426			234			—			162,722			—			—		—			162,956
Net loss	—			—			—			—			—			—		(28,855	)		(28,855	)

Balance as of December 31, 2002	94,093		$	941		$	—		$	276,916		$	(480	)	$	9,169	$	(171,002	)	$	115,544
Repayment of amount due from stockholders	—			—			—			—			316			—		—			316
Employee stock purchases	2,070			21			—			4,862			—			—		—			4,883
Common stock repurchased by Company during the year	(7	)		—			—			(2	)		—			—		—			(2	)
Exercise of stock options	1,081			10			—			3,073			—			—		—			3,083
Net loss	—			—			—			—			—			—		(28,781	)		(28,781	)

Balance as of December 31, 2003	97,237		$	972		$	—		$	284,849		$	(164	)	$	9,169	$	(199,783	)	$	95,043

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

ChipPAC, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	For the Years Ended December 31,
	2003			2002			2001
Cash flows from operating activities:
Net loss	$	(28,781	)	$	(28,855	)	$	(93,736	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		70,090			58,949			59,909
Debt issuance cost amortization		2,216			2,281			2,112
Foreign currency (gain) loss		35			1,029			(187	)
Deferred tax		(1,195	)		(121	)		1,636
Write-down of impaired assets		11,662			—			34,688
Loss from early debt extinguishment		1,182			3,005			—
Gain on sale of building		(3,929	)		—			—
Gain on sale of equipment		(318	)		(50	)		(1	)
Changes in assets and liabilities:
Accounts receivable		(17,935	)		(6,759	)		13,870
Inventories		(10,761	)		(2,818	)		8,769
Prepaid expenses and other current assets		(2,209	)		(770	)		2,205
Other assets		(1,336	)		(415	)		2,866
Accounts payable		29,496			8,710			(23,618	)
Accrued expenses and other current liabilities		(1,676	)		1,562			(11,919	)
Other long-term liabilities		4,288			3,798			(510	)

Net cash provided by (used in) operating activities		50,829			39,546			(3,916	)

Cash flows from investing activities:
Purchase of short-term investments		(204,116	)		(39,699	)		—
Proceeds from sale of short-term investments		179,130			29,699			—
Acquisition of intangible assets		(3,798	)		(3,362	)		(6,156	)
Acquisition of property and equipment		(130,655	)		(78,910	)		(46,392	)
Proceeds from sale of building		5,399			—			—
Proceeds from sale of equipment		786			488			965
Acquisition of test assets		(3,625	)		—			—
Malaysian acquisition, net of cash and cash equivalents acquired		(3,475	)		(6,643	)		(7,399	)

Net cash used in investing activities		(160,354	)		(98,427	)		(58,982	)

Cash flows from financing activities:
Proceeds from revolving loans		27,704			105,596			84,633
Repayment of revolving loans		(27,704	)		(155,596	)		(49,234	)
Net proceeds from long-term debt		144,861			16,700			79,085
Repayment of long-term debt		(52,887	)		(82,440	)		(28,857	)
Increase in debt issuance costs		(180	)		(703	)		(4,520	)
Repayment of notes from stockholders		316			505			520
Proceeds from common stock issuances		7,966			167,144			4,312
Repurchase of common stock		(2	)		(24	)		(19	)

Net cash provided by financing activities		100,074			51,182			85,920

Net increase (decrease) in cash and cash equivalents		(9,451	)		(7,699	)		23,022
Cash and cash equivalents at beginning of year		34,173			41,872			18,850

Cash and cash equivalents at end of year	$	24,722		$	34,173		$	41,872

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

ChipPAC, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)


	For the Years Ended December 31,
	2003		2002		2001
Supplemental disclosure of cash flow information
Income taxes paid	$	563	$	988	$	666

Interest paid	$	28,817	$	31,504	$	33,659

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

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Business, Recapitalization and Basis of Presentation

Business and Organization

ChipPAC, Inc. and its subsidiaries (the “Company” or “ChipPAC”) provide packaging and testing services to the semiconductor industry, with service offerings in communications, computing, consumer, automotive, industrial and multi-applications end markets. The Company packages and tests integrated circuits from wafers provided by its customers. The Company markets its services worldwide, with emphasis on the North American market, based on the headquarters of the Company’s customers. The Company’s packaging and testing operations are located in the Republic of Korea (“South Korea” or “Korea”), the People’s Republic of China (“China”) and Malaysia.

Recapitalization and Reincorporation

Prior to August 5, 1999, the Company represented the combination of four business units of Hyundai Electronics Industries Co., Ltd. (currently Hynix Semiconductor, Inc.) (“HEI”) which operated collectively as HEI’s worldwide packaging and testing operations.

On August 5, 1999, affiliates of Bain Capital, Inc. and SXI Group LLC, a portfolio concern of Citicorp Venture Capital, Ltd., which we refer to collectively as the “Equity Investors,” and management acquired a controlling interest in the Company from HEI through a series of transactions, including a merger into ChipPAC, Inc. of a special purpose corporation organized by the Equity Investors. The merger was structured to be accounted for as a recapitalization.

On June 13, 2000 the Company was reincorporated in Delaware (“ChipPAC Delaware”). In order to effect the reincorporation, ChipPAC, Inc., a California corporation (“ChipPAC California”), was merged with and into ChipPAC Delaware and as a result of which ChipPAC California ceased to exist. The Company operates its business as ChipPAC, Inc.

Basis of Presentation

The financial statements for the years ended December 31, 2003, 2002 and 2001, have been prepared on a consolidated basis. The consolidated financial statements include the accounts of ChipPAC, Inc. and its majority controlled and owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain prior period balances have been reclassified to conform to the current period presentation.

Recent Events—Proposed Merger

On February 10, 2004, the Company 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, the Company 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 consummation of the merger, STATS and ChipPAC stockholders will own approximately 54% and 46% of the combined company, respectively, on a fully-converted basis. 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.

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 the Company’s outstanding Class A common stock will be required to approve the merger. The Company’s board of directors has voted to approve the transaction and recommend that its 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.

Note 2: Summary of Significant Accounting Policies

Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenue and expenses in the financial statements and accompanying notes. Significant estimates made by management include: the useful lives of property, plant and equipment and intangible assets as well as future cash flows to be generated by those assets; revenue reductions relating to customer programs and incentive offerings; allowances for doubtful accounts, customer returns, and deferred tax assets; inventory realizability and contingent liabilities, among others. Actual results could differ from the estimates, and such differences may be material to the consolidated financial statements.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consisted of cash and money market funds at December 31, 2003 and 2002.

Short-term Investments

The Company invests excess cash in auction rate corporate notes which are high-quality and easily marketable instruments to ensure cash is readily available for use in current operations. These instruments have maturity terms of generally 30 days or less. Short-term investments are categorized as available for sale and recorded at market. Due to the short-term nature of these investments, cost approximates market value. The average interest rates on the cash and cash equivalents and short-term investments were 1.0% and 1.4%, respectively.

Financial Instruments

The amounts reported for cash and cash equivalents, short-term investments, accounts receivable, certain other assets, accounts payable, certain accrued and other liabilities, short-term and long-term debt approximate fair value due to their short maturities or market interest rates.

Comprehensive Income (Loss)

Statement of Financial Accounting Standard No. 130 “Reporting Comprehensive Income” establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income (loss) includes all changes in equity during a period from transactions and events from non owner sources. In the years ended December 31, 2003, 2002 and 2001, comprehensive income (loss) equaled net income (loss).

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Inventories

Inventories are stated at the lower of cost (computed using the first-in, first-out method) or market value. The Company generally does not take ownership of its customer supplied semiconductors. The risk of loss associated with the customer supplied semiconductors remains with the customer. These customer supplied semiconductors are not included as part of the Company’s inventories.

Long-Lived Assets

Long-lived assets held by the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of carrying amounts to future net cash flows an asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount which the carrying amount of the assets exceeds the fair value of the asset.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. The Company uses the straight-line method to depreciate machinery and equipment over their estimated useful lives from three to eight years. Building facilities and building improvements located in the Shanghai, China facilities are depreciated over 20 years. Building facilities and building improvements in the Kuala Lumpur, Malaysia facilities are depreciated over 25 and 17 years, respectively. Land use rights in Shanghai, China and Kuala Lumpur, Malaysia are amortized over 50 and 99 years, respectively. Leasehold improvements are amortized over the shorter of the asset life or the remaining lease term.

Intangibles

Intangibles are amortized over their useful lives on a straight-line basis over a period of three to 17 years. We classify our intangibles into three main groups: intellectual property with useful lives ranging from seven to 17 years, software and software development with useful lives of three years and licenses with useful lives of five years.

Concentration of Credit Risk and Major Customers

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade accounts receivable and cash and cash equivalents.

The Company’s customers are comprised of companies in the semiconductor industry located primarily in the United States of America. Credit risk with respect to the Company’s trade receivables is mitigated by selling to well established companies, performing ongoing credit evaluations and maintaining frequent contact with customers. The allowance for doubtful accounts is based upon the expected collectability of the Company’s accounts receivable.

At December 31, 2003, there was no single customer who accounted for more that 10% of the outstanding trade receivables. At December 31, 2002, three customers accounted for 16%, 15% and 11% of the outstanding trade receivables. Loss of or default by these customers could have an adverse effect upon the Company’s financial position, results of operations and cash flows.

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Cash and cash equivalents are deposited with banks in the United States of America, South Korea, China, Malaysia, Barbados, British Virgin Islands, Luxembourg, and Hungary. Deposits in these banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses to date on its bank cash deposits.

Revenue Recognition

The Company recognizes revenue upon completion of services, generally at the time of shipment of packaged semiconductors to its customers. Additionally, we record estimated reductions to revenue for customer programs and incentive offerings including special pricing agreements, price protection, promotions and other volume-based incentives. The Company generally does not take ownership of customer supplied semiconductors as these materials are sent to the Company on a consignment basis. Accordingly, the value of the customer supplied materials are neither reflected in revenue nor in cost of revenue. The Company warrants its services; warranty claims historically have been insignificant.

Research and Development Costs

Research and development costs are charged to expense as incurred.

Accounting for Income Taxes

The Company accounts for deferred income taxes using the liability method whereby deferred tax assets and liabilities are recorded for temporary differences between amounts reported in the financial statements and amounts that are reported in the Company’s income tax returns. A valuation allowance is provided for deferred tax assets when management cannot conclude, based on the available evidence, that it is more likely than not that all or a portion of the deferred tax assets will be realized through future operations. The provision for income taxes represents taxes that are payable for the current period, plus the net change in deferred tax amounts.

Computation of Net Income per Share of Common Stock

Basic net income (loss) per share of common stock is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share of common stock is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares result from dilutive stock options and the convertible subordinated notes.

Foreign Currency Translation

The functional currency of the Company’s foreign operations is the U.S. dollar. Therefore, gains and losses resulting from translation from local currencies to the U.S. dollar are included in determining net income or loss for the period.

Stock-Based Compensation

At December 31, 2003, the Company has three stock-based employee compensation plans, which are described more fully in Note 14. The Company accounts for those plans under the recognition and measurement principles of APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to the stock-based employee compensation.


	Year Ended December 31,
	2003			2002			2001
	(In thousands, except per share amounts)
Net loss as reported	$	(28,781	)	$	(28,855	)	$	(93,736	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(4,097	)		(4,581	)		(6,130	)

Pro forma net loss	$	(32,878	)	$	(33,436	)	$	(99,866	)

Loss per share as reported:
Basic	$	(0.30	)	$	(0.33	)	$	(1.36	)
Diluted	$	(0.30	)	$	(0.33	)	$	(1.36	)

Pro forma loss per share:
Basic	$	(0.34	)	$	(0.38	)	$	(1.45	)
Diluted	$	(0.34	)	$	(0.38	)	$	(1.45	)

Recent Accounting Pronouncements

In May 2002, the FASB 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 2003, the Company has 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 FASB 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 was effective for exit or disposal activities that are initiated after December 31, 2002. The Company 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.

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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. The Company adopted FIN 45 in the first quarter of 2003 and has met the disclosure requirements of FIN 45. The adoption of FIN 45 has no material impact on the Company’s 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 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company has adopted EITF Issue No. 00-21. The adoption of EITF Issue No. 00-21 has no material impact on the Company’s financial statements.

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 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. The Company adopted SFAS No. 148 in the first quarter of 2003. The adoption of SFAS No. 148 has no material impact on its 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. The Company believes that the adoption of this standard will have no material impact on its financial statements.

In April 2003, the FASB 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. The Company adopted SFAS No. 149 during 2003. The adoption of SFAS No. 149 will not have a material impact on its financial position and results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” The Statement establishes standards for how an issuer classifies

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and measures certain financial instruments with characteristics of both liabilities and equity and further requires that an issuer classify as a liability (or an asset in some circumstances) financial instruments that fall within its scope because that financial instrument embodies an obligation of the issuer. Many of these instruments were previously classified as equity. The statement 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. The Company adopted SFAS No. 150 during 2003. The adoption of this standard will not have a material impact on its financial position and results of operations.

Note 3: Acquisition of Malaysian Business

Under the terms of the agreement relating to the Company’s June 2000 acquisition of the Malaysian business, during the period from June 1, 2000 to June 30, 2003, the seller, Intersil, was 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 the Company paid Intersil the sum of $17.9 million in the aggregate as additional purchase price. At December 31, 2003, the Company has no further obligations under this arrangement. Additionally, the Company 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 recorded deferred tax of $6.1 million on all of these adjustments. All of these additional contingent incentive payments and other adjustments 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 exceeded 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:


Non-current asset	Estimated Fair Value		Excess of Fair Value of Acquired Net Amounts Over Cost			Total Additional Purchase Price		Adjusted Value
			(in millions)
Land and buildings	$	27.9	$	(11.1	)	$	5.0	$	21.8
Plant and equipment		93.9		(36.9	)		18.3		75.3
Intellectual property		20.9		(8.2	)		3.1		15.8

	$	142.7	$	(56.2	)	$	26.4	$	112.9

Note 4: Lines of Credit and Other Bank Borrowings

Lines of Credit

The Company has a borrowing capacity of $50.0 million for working capital and general corporate purposes under the revolving credit line portion of its senior credit facilities. The revolving credit line under the senior credit facilities matures on July 31, 2005. During the year ended December 31, 2003, the Company borrowed and repaid $26.5 million against this 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, the Company 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 the Company.

The Company has 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

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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. The Company also has a line of credit with a limit of $0.5 million per borrowing available with Southern Bank Bhd for general corporate purposes at an interest rate of 6.9% per annum. During the year ended December 31, 2003, the Company 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, the Company did not use this line of credit, and there was no outstanding balance on this loan.

Other Borrowings

On May 28, 2003, the Company 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. The Company 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 Company’s 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. The Company 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 to register $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. The Company 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, the Company’s 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.

Note 5: Risks and Uncertainties

Industry

The Company’s business involves certain risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, dependence on a cyclical industry that is characterized by rapid technological changes, fluctuations in end-user demands, evolving industry standards, competitive pricing and declines in average selling prices, risks associated with foreign currencies, and enforcement of intellectual property rights. Additionally, the market in which the Company operates is very competitive. As a result of these industry and market characteristics, key elements of competition in the independent semiconductor packaging market include breadth of packaging offerings, time-to-market, technical competence, design services, quality, production yields, reliability of customer service and price.

The Company reduced the concentration of its customers that make up more than 10.0% of sales from three customers in the year 2001 accounting for 51.3% of total revenue, and five customers in 2002 accounting for 66.3% of total revenue, to four customers in 2003 accounting for 50.0% of total revenue. Nonetheless, any decommitment from any major customer for products could have an adverse impact on the Company’s financial position, results of operations and cash flows.

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In 2003, 2002 and 2001, the Company had four, five and three customers, which each accounted for more than 10.0% of sales, respectively. These customers include Fairchild Semiconductor International, Inc., Intel Corporation, Intersil Corporation, LSI Logic Corporation and nVIDIA Corporation.

Other

South Korean, Chinese, and Malaysian foreign currency exchange regulations may place restrictions on the flow of foreign funds into and out of those countries. The Company is required to comply with these regulations when entering into transactions in foreign currencies in South Korea, China and Malaysia. As of December 31, 2003 and 2002, there were no restrictions on foreign funds flow.

Note 6: Selected Balance Sheet Accounts

The components of inventories were as follows (in thousands):


	December 31,
	2003		2002
Raw materials	$	20,029	$	11,198
Work in process		4,761		3,293
Finished goods		1,270		808

		26,060		15,299

Property, plant and equipment were comprised of the following (in thousands):


	December 31,
	2003			2002
Land use rights	$	11,171		$	12,368
Buildings and improvements		70,330			66,404
Equipment		621,327			529,710

		702,828			608,482
Less accumulated depreciation and amortization		(305,561	)		(272,085	)

	$	397,267		$	336,397

Land use rights represent payments made to secure, on a fully paid-up basis, the use of the property where the Company’s facilities are located in Shanghai, China and Kuala Lumpur, Malaysia for a period of 50 and 99 years, respectively. The land use rights expire in the year 2044 for Shanghai, China and in the year 2086 for Kuala Lumpur, Malaysia.

Other assets were comprised of the following (in thousands):


	December 31,
	2003		2002
Deposits	$	925	$	836
Long-term employee loans		1,020		802
Debt issuance costs, net of amortization of $5,332 and $5,944		12,134		10,132
Other		2,218		1,187

	$	16,297	$	12,957

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Intangible assets balances are summarized as follows (in thousands):


	December 31, 2003						December 31, 2002
	Gross Assets		Accumulated Amortization		Net Assets		Gross Assets		Accumulated Amortization		Net Assets
Intellectual property	$	16,884	$	7,310	$	9,574	$	15,734	$	4,980	$	10,754
Software and software development		17,313		11,194		6,119		14,231		8,460		5,771
Licenses		4,497		4,330		167		4,422		3,647		775

	$	38,694	$	22,834	$	15,860	$	34,387	$	17,087	$	17,300

Amortization expense for intangible assets is summarized as follows (in thousands):


	Year Ended December 31,
	2003		2002		2001
Intellectual property	$	2,330	$	2,121	$	1,955
Software and software development		2,734		2,554		2,483
Licenses		683		397		2,812

	$	5,747	$	5,072	$	7,250

Intangible assets are being amortized over estimated useful lives of three to 17 years. Estimated future amortization expense is as follows (in thousands):


2004	$	5,322
2005		4,606
2006		3,459
2007		1,428
2008		153
Thereafter		892

Total	$	15,860

Accrued expenses and other liabilities were comprised of the following (in thousands):


	December 31,
	2003		2002
Payroll and related items	$	14,150	$	14,778
Interest payable		9,311		9,210
Other expenses		4,263		5,412

	$	27,724	$	29,400

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 7: Restructuring, write-down of impaired assets and other charges

Restructuring

2003

During the year ended December 31, 2003, restructuring plans were executed to realign the Company’s organization and reduce operating costs to better align the Company’s expenses with revenue. As of December 31, 2003, the Company 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.

2002

In 2002, the Company utilized $0.3 million of the restructuring reserve for reductions in workforce in its South Korean operations and wrote off executive officer loans against the related $1.5 million loan loss reserve. In 2002, the Company completed another 92 of the planned 751 employee separations. Cumulatively the Company completed 646 of the planned 751 employee separations at December 31, 2002. Due to stronger than expected performance from the South Korean subsidiary and the sale of its plating line in Korea which had been planned to be shut down, reserve releases in the amount of $1.3 million were credited to restructuring charges in the statement of operations for the year ended December 31, 2002. There are no further terminations or other restructuring activities planned for which amounts were reserved in 2001. This credit of $1.3 million was reduced by a restructuring action in the Malaysian plant in which $0.6 million was incurred to terminate 30 employees. This action was not included in the 2001 reserves.

2001

In the first and fourth quarters of 2001, ChipPAC’s management approved restructuring plans to realign its organization and reduce operating costs. These actions were designed to better align ChipPAC’s workforce with the decrease in demand and to reduce selling, general, and administrative expenses. These plans were a combination of reductions in force and furloughs. Accordingly, ChipPAC planned to reduce 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 quarters of 2001, respectively. The entire first quarter charge was related to employee separations and furloughs. The fourth quarter charge was comprised of $1.8 million related to employee separations and a $1.5 million loan loss reserve for executive officer loans. Employee separation benefits under each plan were similar and included severance, medical and other benefits. As of December 31, 2001, ChipPAC completed 554 of the planned 751 employee separations and all of the furloughs planned for 2001.

Components of accrued restructuring costs and amounts charged for restructuring as of December 31, 2003 were as follows (in thousands):


	Beginning Accrual		Expenditures			December 31, 2001		Adjustments			Expenditures			December 31, 2002		Accrual		Expenditures			December 31, 2003
Employee separations	$	4,732	$	(3,100	)	$	1,632	$	(1,283	)	$	(349	)	$	—	$	1,957	$	(1,458	)	$	499
Loan loss reserve		1,500		—			1,500		—			(1,500	)		—		—		—			—

	$	6,232	$	(3,100	)	$	3,132	$	(1,283	)	$	(1,849	)	$	—	$	1,957	$	(1,458	)	$	499

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Write-down of impaired assets

The Company reviews property, plant and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company determines whether there has been an impairment by comparing the anticipated undiscounted future net cash flows to be generated by an asset to its carrying value. If an asset is considered impaired, the asset is written down to fair value which is either determined based on discounted cash flows or appraised or estimated values, depending on the nature of the asset. During the year ended December 31, 2003, the Company wrote down impaired assets by $11.7 million. The Company determined that the expected cash flow related to certain manufacturing equipment were not sufficient to recover the carrying value of the equipment. As the result of this analysis, the carrying values of these assets were written down to the estimated fair market value and will continue to be depreciated over the remaining useful lives. There were no equivalent write-offs in the same period during 2002. During the year ended December 31, 2001, the Company wrote down impaired assets by $34.7 million. The asset write-down related primarily to the Company’s manufacturing assets in the assembly and test facilities in South Korea and Malaysia. The Company determined that due to excess capacity, the future expected cash flows related to equipment for certain package types would not be sufficient to recover the carrying value of the manufacturing equipment in the facility for those package types. The carrying values of these assets were written down to the estimated fair value and continued to depreciate over their remaining useful lives.

Note 8: Earnings per Share

Statement of Accounting Standards No. 128 requires a reconciliation of the numerators and denominators of the basic and diluted per share computations. Basic earnings per share (“EPS”) is computed by dividing net income available to stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS is computed using the weighted average number of shares of common stock and all potentially dilutive shares of common stock outstanding during the period. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and the if-converted method is used for determining the number of shares assumed issued from the conversion of the convertible subordinated notes.

As of December 31, 2003, there were options outstanding to purchase 7.4 million shares of Class A common stock with a weighted average exercise price of $3.81, which could potentially dilute basic earnings per share in the future, but which were not included in diluted earnings per share as their effect would have been antidilutive. The Company also has outstanding $200.0 million aggregate principal amount of convertible subordinated notes, which are convertible into approximately 23.6 million shares of Class A common stock but were not included in diluted earnings per share as their effect would also have been antidilutive. Had these options and the convertible subordinated notes been included in the diluted earnings per share counts, the total of weighted average shares of Class A common stock would have been 122,471,240 shares.

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods presented below.


	December 31, 2003							December 31, 2002							December 31, 2001
	Loss			Shares	Per-Share Amount			Loss			Shares	Per-Share Amount			Loss			Shares	Per-Share Amount
	(In thousands, except per share amounts)
Basic EPS:
Loss per share	$	(28,781	)	95,554	$	(0.30	)	$	(25,850	)	87,430	$	(0.30	)	$	(93,736	)	68,878	$	(1.36	)
Effect of dilutive securities:
Stock options and warrants				—							—							—
Diluted EPS:
Loss per share	$	(28,781	)	95,554	$	(0.30	)	$	(25,850	)	87,430	$	(0.30	)	$	(93,736	)	68,878	$	(1.36	)

Note 9: Segments and Geographic Information

The Company is engaged in one industry segment, the packaging and testing of integrated circuits.

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


	Year Ended December 31,
	2003		2002		2001
Substrate	59.0	%	50.9	%	46.0	%
Lead frame	27.1		33.6		40.2
Test	13.9		15.5		13.8

Total	100.0	%	100.0	%	100.0	%

Revenue from unaffiliated customers is based on the geographic location of each plant’s principal place of business. The Company’s sales by geographic location of the customer were as follows (in thousands):


	December 31,
Region	2003		2002		2001
USA	$	369,102	$	323,663	$	302,405
Asia		51,503		36,367		19,722
Europe		8,584		3,636		6,574

Total	$	429,189	$	363,666	$	328,701

The following table presents long-lived identifiable assets based on the location of the asset (in thousands):


	December 31,
Region	2003		2002
United States	$	16,782	$	9,079
British Virgin Islands		14,886		18,928
South Korea		169,745		142,630
China		100,351		103,177
Malaysia		127,660		92,840

Total	$	429,424	$	366,654

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 10: Senior Credit Facilities

Under the terms of the recapitalization and merger in 1999 all short and long-term debt, loans and leases and other credit facilities existing prior to the recapitalization were terminated at the recapitalization date.

To finance part of the recapitalization, the Company borrowed $300.0 million of new debt, comprising $150.0 million of term loans and $150.0 million of senior subordinated notes. The term loans bore interest based on the London Interbank Offered Rate (LIBOR, 1.43% at December 31, 2003) plus 4.3% and the senior subordinated notes bear interest at 12.75% per annum. In 2001, an additional $15.0 million of senior subordinated notes were issued in a private placement. As of December 31, 2003, the balances of the term loans were zero and the balance of the senior subordinated notes was $165.0 million. The senior subordinated notes mature on August 1, 2009. If a change of control occurs, the Company may be required to allow holders of the senior subordinated notes to sell the Company their notes at a purchase price of 101.0% of the principal amount of the notes, plus accrued and unpaid interest. The pending merger with ST Assembly Test Services, Ltd would constitute a change of control. Interest is payable semi-annually for the senior subordinated notes and quarterly for the term loans.

The Company has a borrowing capacity of $50.0 million under the senior credit facilities, for working capital and general corporate purposes under the revolving credit line portion of its senior credit facilities. The revolving credit line under the senior credit facilities matures on July 31, 2005. During the year ended December 31, 2003, the Company 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, the Company 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 the Company.

The Company’s senior credit facilities, as amended, contain covenants restricting the Company’s operations and requiring that the Company meet specified financial tests. Beginning with the quarter ending December 31, 2002, 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.

In May and June 2003, the Company 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, the Company used proceeds from the secondary public offering to pay off its remaining 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.

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Future maturities of long-term debt at December 31, 2003 were as follows (in thousands):


Year Ended December 31,
2004		—
2005		—
2006		—
2007		—
2008		150,000
2009		165,000
2010		—
2011		50,000

	$	365,000
Less current portion		—

Non current portion	$	365,000

Substantially all assets of the ChipPAC consolidated group, with the exception of the Chinese non-guarantor entity, ChipPAC Shanghai, have been pledged as collateral under the term debt and revolving credit facilities agreement put in place on August 5, 1999. The indenture governing the 12.75% senior subordinated notes has been fully and unconditionally guaranteed, jointly and severally on a senior subordinated basis by the parent company and the guaranteeing subsidiaries. See Note 20—Supplemental Financial Statements of Guarantor/Non-Guarantor Entities.

Note 11: Common Stock and Stockholders’ Equity

A portion of certain shares sold by the Company are subject to a right of repurchase by the Company subject to vesting, which is generally over a four year period from the earlier of grant date or employee hire date, as applicable until vesting is complete. At December 31, 2003, there were 8,573 shares subject to repurchase.

The Company currently has authorized Class A and B common stock. There are 250,000,000, $0.01 par value, shares authorized of each Class A and Class B common stock. At December 31, 2003 and 2002 there were 97,237,000 and 94,093,000 shares, respectively, of Class A common stock issued and outstanding. There were no shares of Class B common stock issued or outstanding at December 31, 2003 or 2002.

On June 13, 2000 the Company was reincorporated in Delaware. In order to effect the reincorporation, ChipPAC, Inc., a California corporation, was merged with and into ChipPAC Delaware and as a result of which ChipPAC California ceased to exist. The Company operates its business as ChipPAC, Inc. The merger occurred immediately prior to the effectiveness of the Company’s Registration Statement on Form S-1 for its initial public offering. In the merger, each outstanding share of ChipPAC California Class A common stock was converted into one share of ChipPAC Delaware Class A common stock. Each outstanding share of ChipPAC California Class B common stock was converted into one share of ChipPAC Delaware Class B common stock. Each outstanding share of ChipPAC California Class L common stock was converted into and became one share of ChipPAC Delaware Class A common stock plus an additional number of shares of ChipPAC Delaware Class A common stock which was determined by dividing a preferential distribution, based in part on the original cost of such share plus an amount which accrued daily at a rate of 12.0% per annum, compounded quarterly, by the per share price of the ChipPAC Delaware Class A common stock in the initial public offering. As a result, Class L common stockholders received 8,880,507 shares of Class A common stock.

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, the Company 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, the Company sold 10,000,000 shares of Class A common stock in an underwritten public offering for $6.00 per share. On February 14, 2002, the Company sold an additional 1,425,600 shares of Class A common stock in conjunction with the underwriter’s exercise of their over-allotment option for $6.00 per share. In connection with these sales, the Company 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.

On May 30, 2002, the Company 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, the Company 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


	January Offering			May Offering			Totals
	(in thousands)
Source of funds:
Gross proceeds from issuance of common stock	$	68,554		$	105,000		$	173,554
Less: related issuance costs		(4,768	)		(5,830	)		(10,598	)

Net proceeds from issuance of common stock	$	63,786		$	99,170		$	162,956

Use of funds:
Repayment of senior credit facilities	$	62,438		$	50,000		$	112,438
General corporate purposes		1,348			49,170			50,518

	$	63,786		$	99,170		$	162,956

In June 2002, the Company 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 its senior credit facilities. As a result, capitalized debt issuance costs of $3.0 million were written off and the expense is included in the results for the year ended December 31, 2002.

Based upon quoted market prices, the fair value of our Senior Subordinated Notes as of December 31, 2003 and 2002 was $181.5 million and $173.1 million, respectively. Based upon quoted market prices, the fair value of our 2.5% Convertible Subordinated Notes as of December 31, 2003 was $188.3 million.

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 12: Commitments

The Company’s executive offices in the United States of America were leased from Hyundai Electronics America (“HEA”) until May 2001. Thereafter, the Company’s executive offices were moved to Fremont, California and are currently leased from an unrelated party. The Company’s facilities in Korea are leased from HEI under non-cancelable operating lease arrangements through 2004 with an option to extend to 2009. Rent expense in the years ended December 31, 2003, 2002, and 2001 was $4.9 million, $5.0 million, and $6.4 million respectively.

Future annual minimum lease payments under noncancellable operating leases that have initial or remaining noncancellable lease terms in excess of one year at December 31, 2003 were as follows (in thousands):


Years Ended December 31,
2004	$	7,360
2005		7,014
2006		6,460
2007		6,387
2008		6,247
Thereafter		23,253

	$	56,721

The Company is party to certain royalty and licensing agreements which have anticipated payments of $579 thousand, $331 thousand, $248 thousand and $248 thousand payable in 2004, 2005, 2006 and 2007, respectively.

In the ordinary course of business, the Company is subject to claims and litigation, including claims that it infringes third party patents, trademarks and other intellectual property rights. Although the Company believes that it is unlikely that any current claims or actions will have a material adverse impact on its operating results on our financial position, given the uncertainty of litigation, we can not be certain of this. Moreover, the defense of claims or actions against the Company, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

The Company is currently party to legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these matters is not presently determinable and cannot be predicted with certainty, management does not believe that the outcome of any of these matters or any of the above mentioned legal claims will have a material adverse effect on the Company’s financial position, results of operations or cash flow.

Note 13: Related Party Transactions


	December 31,
	2002		2001
	(In thousands)
Revenue from sale of packaging and testing services to HEI group	$	3,367	$	4,623
Reimbursement for plating services provided to HEI group including margin of $25 and $2,020, respectively		4,526		6,392
Accounts receivable at year end for sales and plating services to HEI Group		6		417
Accounts payable to HEI group for common area use of facilities and utilities		962		1,370

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The HEI group sold its entire equity investment of the Company in 2002 and was not considered a related party during the year ended December 31, 2003.

During the years ended December 31, 2001, HEA charged $0.3 million to the Company for rent and building related taxes, insurance, and maintenance. There were no similar expenses in the year 2002 or 2003.

At June 30, 1998, Hyundai Information Technology (“HIT”) entered into a three-year agreement with ChipPAC Korea to provide information technology services. This agreement terminated in June 2002. For the years ended December 31, 2002 and 2001, HIT charged ChipPAC Korea $0.5 million and $0.9 million, respectively.

Note 14: 2000 Equity Incentive Plan and 1999 Stock Purchase and Option Plan

The Company adopted the 1999 Stock Purchase and Option Plan, or the “1999 Stock Plan,” which authorized the granting of stock options and the sale of Class A common stock or Class L common stock to current or future employees, directors, consultants or advisors of the Company. Under the 1999 Stock Plan, a committee of the board of directors authorized to sell or otherwise issue Class A common stock or Class L common stock at any time prior to the termination of the 1999 Stock Plan in such quantity, at such price, on such terms and subject to such conditions as established by the committee up to an aggregate of 15,500,000 shares of Class A common stock and 500,000 shares of Class L common stock, including shares of common stock with respect to which options may be granted, subject to adjustment upon the occurrence of specified events to prevent any dilution or expansion of the rights of participants that might otherwise result from the occurrence of such events. No options or stock grants have been made under the 1999 Stock Plan since the initial public offering, when the 2000 Equity Incentive Plan or “2000 Plan” became effective.

The Company’s 2000 Plan was adopted by the board of directors and approved by the stockholders on June 14, 2000. Amendments to the 2000 Plan were adopted by the board of directors on January 30, 2001, and approved by the stockholders on March 16, 2001. The 2000 Plan provides for the grant of incentive stock options to employees (including officers and employee directors) and for the grant of nonstatutory stock options to employees, directors and consultants. A total of (1) 11,615,698 shares of common stock, (2) any shares returned to the Company’s 1999 Stock Plan as a result of termination of options and (3) annual increases to be added on the date of each annual meeting of stockholders of the Company commencing in 2001 equal to one percent of the outstanding shares of common stock, or a lesser amount as may be determined by the board of directors, have been reserved for issuance pursuant to the 2000 Plan.

In 2003, 92,982 shares were returned from the 1999 Stock Plan and pooled into the 2000 Stock Plan. In May 2003, an additional 950,927 shares were added to the 2000 Plan as the result of the annual increase of one percent of the outstanding shares of common stock as of the annual meeting of the stockholders.

Options are granted at the fair market value and expire up to ten years after the date of grant. Vesting occurs usually over a two to four-year period.

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes stock option activity under the 1999 Stock Plan:


1999 Option Plan	Options Available for Grant		Options Outstanding		Weighted Average Exercise Price
Balances at December 31, 2000	—		1,688,240		$	6.71
Options repurchased	57,669		—			—
Options cancelled	201,362		(201,362	)		6.99
Vested options expired	22,612		(22,612	)		7.48
Options exercised	—		(106,772	)		1.74
Options transferred	(281,643	)	—			—

Balances at December 31, 2001	—		1,357,494		$	7.05
Options repurchased	30,719		—			—
Options cancelled	111,670		(111,670	)		6.33
Vested options expired	17,924		(17,924	)		10.59
Options exercised	—		(104,395	)		4.20
Options transferred	(160,313	)	—			—

Balances at December 31, 2002	—		1,123,505		$	7.35
Options repurchased	7,002		—			—
Options cancelled	25,686		(25,686	)		11.51
Vested options expired	60,294		(60,294	)		11.90
Options exercised	—		(204,109	)		4.25
Options transferred	(92,982	)	—			—

Balances at December 31, 2003	—		833,416		$	7.61

The following table summarizes stock option activity under the 2000 Plan:


2000 Option Plan	Options Available for Grant		Options Outstanding		Weighted Average Exercise Price
Balances at December 31, 2000	39,469		1,250,732		$	4.93
Options reserved	10,756,426		—			—
1999 options transfer-in	281,643		—			—
Options granted	(4,768,235	)	4,768,235			2.95
Options cancelled	228,001		(228,001	)		4.81
Vested options expired	200		(200	)		7.88

Balances at December 31, 2001	6,537,504		5,790,766		$	3.30
Options reserved	811,081		—			—
1999 options transfer-in	160,313		—			—
Options granted	(334,600	)	334,600			6.02
Options cancelled	668,865		(668,865	)		3.32
Vested options expired	18,334		(18,334	)		8.03
Options exercised	—		(137,540	)		2.97

Balances at December 31, 2002	7,861,497		5,300,627		$	3.46
Options reserved	950,927		—			—
1999 options transfer-in	92,982		—			—
Options granted	(2,672,280	)	2,672,280			2.92
Options cancelled	434,980		(434,980	)		3.48
Vested options expired	53,133		(53,133	)		7.65
Options exercised	—		(877,219	)		2.56

Balances at December 31, 2003	6,721,239		6,607,575		$	3.33

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes information with respect to options outstanding and exercisable at December 31, 2003:


	Options Outstanding			Options Exercisable
Exercise Price	Number of Shares	Weighted Avg. Exercise Price	Weighted Avg. Remaining Contractual Life	Number of Shares	Weighted Avg. Exercise Price
$0.29 – 0.29	74,672	$0.29	5.9	71,812	$0.29
1.80 – 2.55	3,636,823	2.29	8.6	1,424,268	1.88
2.78 – 4.07	2,154,396	3.48	7.2	898,706	3.34
4.59 – 6.14	863,393	5.69	7.3	496,665	5.56
6.90 – 9.52	320,243	8.43	8.0	126,926	8.59
12.60 – 12.75	391,464	12.63	6.5	273,447	12.63

$0.29 – 12.75	7,440,991	$3.81	7.9	3,291,824	$3.95

The estimated weighted average fair value of options granted in 2003, 2002 and 2001 were $2.92, $6.02 and $2.95, respectively, based on the Black-Scholes option pricing model using assumptions as described below.

Employee Stock Purchase Plan

In 2000, the Company adopted an employee stock purchase plan (“ESPP”) for the benefit of its employees. The ESPP qualified in the United States of America under section 423 of the Internal Revenue Code. Under the ESPP, substantially all employees may purchase the Company’s Class A common stock through payroll deductions at a price equal to 85.0% of the lower of the fair market value at the beginning or the end of each specified six-month offering period. Stock purchases are limited to 15.0% of an employee’s eligible compensation. During 2003, a total of 2,069,921 shares of Class A common stock at a weighted average price of $2.36 per share, were issued through the ESPP. For the year 2002, a total of 1,092,047 shares of Class A common stock at a weighted average price of $3.05 per share were issued. At December 31, 2003, 7,059,339 shares were reserved for future issuance under the ESPP.

The estimated weighted average fair value of shares purchased under the Employee Stock Purchase Plan in 2003 and 2002 was $0.79 and $1.90, respectively.

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation

No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect of net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to the stock-based employee compensation.


	Year Ended December 31,
	2003			2002			2001
	(In thousands, except per share amounts)
Net loss as reported	$	(28,781	)	$	(28,855	)	$	(93,736	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(4,097	)		(4,581	)		(6,130	)

Pro forma net loss		(32,878	)		(33,436	)		(99,866	)

Loss per share as reported:
Basic	$	(0.30	)	$	(0.33	)	$	(1.36	)
Diluted	$	(0.30	)	$	(0.33	)	$	(1.36	)
Pro forma loss per share:
Basic	$	(0.34	)	$	(0.38	)	$	(1.45	)
Diluted	$	(0.34	)	$	(0.38	)	$	(1.45	)

In calculating pro forma compensation, the fair value of each stock option and stock purchase right is estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions:


	Employee Stock Options December 31,
	2003	2002	2001
Dividend yield	None	None	None
Volatility	56%-71%	56%	57%
Risk-free interest rate	1.91%-2.90%	3.00%-4.57%	3.63%-4.83%
Expected lives (in years)	4	4	2-4


	Employee Stock Purchase Plan December 31,
	2003	2002	2001
Dividend yield	None	None	None
Volatility	56%	56%	57%
Risk-free interest rate	1.18%-1.65%	1.96%-2.95%	4.96%-6.33%
Expected lives (in years)	0.5	0.5	0.5

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 15: Income Taxes

The components of the provision for income taxes are comprised of the following (in thousands):


	Year Ended December 31,
	2003			2002			2001
Current
Federal	$	—		$	—		$	—
State		5			6			1
Foreign		3,190			2,115			941

Total Current		3,195			2,121			942

Deferred
Federal		—			—			3,327
State		—			—			385
Foreign		(1,195	)		(121	)		(2,076	)

Total Deferred		(1,195	)		(121	)		1,636

Provision for income taxes	$	2,000		$	2,000		$	2,578

Loss before income taxes is comprised of the following (in thousands):


	Year Ended December 31,
	2003			2002			2001
Domestic	$	(5,613	)	$	(2,117	)	$	(483	)
Foreign		(21,168	)		(24,738	)		(90,675	)

	$	(26,781	)	$	(26,855	)	$	(91,158	)

A summary of the composition of net deferred income tax assets (liabilities) is as follows (in thousands):


	December 31,
	2003			2002
Assets:
Loss due to impaired assets	$	842		$	1,783
Income recognized for tax but not for books		3,843			15,099
Tax credits		15,230			10,691
NOL Carryforward		7,886			6,137
Other		2,327			2,331

Total gross deferred tax assets		30,128			36,041
Less valuation allowance		(18,575	)		(24,188	)

Net deferred tax assets		11,553			11,853
Liabilities:
Depreciation		(18,427	)		(18,354	)

Gross deferred tax liabilities		(18,427	)		(18,354	)

Total net deferred tax asset/(liability)	$	(6,874	)	$	(6,501	)

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2003, the Company established a partial valuation allowance against its gross deferred tax assets to reduce the assets to the amount the Company deemed, more likely than not, to be recoverable prior to repatriation. The Company considered, among other factors, its historical profitability, excluding effect of one-time charges, projections of future taxable income and the ability of the Company’s foreign subsidiaries to utilize their deferred tax assets. The net change in total valuation allowance as of December 31, 2003 was an increase of approximately $1.1 million. A portion of the valuation allowance was attributable to the potential tax benefit of stock based compensation totaling approximately $0.3 million in 2003 and $0.2 million in 2002. These amounts, if realized, will be credited to additional paid-in capital.

Included in deferred tax liabilities relating to depreciation as of December 31, 2003 is an amount of $6.1 million relating to additional purchase price for the Malaysia business, which was included in non-current assets. The total net deferred tax liability is included in other long-term tax liabilities.

Reconciliation of the statutory federal income tax to the Company’s effective tax:


	December 31,
	2003		2002		2001
Tax at federal statutory rate	35.0	%	35.0	%	35.0	%
State, net of federal benefit	0.4		2.1		0.9
Valuation allowance on net operating loss	—		—		(6.8	)
Foreign operation net difference	(41.4	)	(44.6	)	(31.4	)
Other	(1.5	)	0.1		(0.5	)

Provision for income taxes	(7.5	)%	(7.4	)%	(2.8	)%

At December 31, 2003, the Company had approximately $15.2 million of federal and $8.5 million of state net operating loss carryforwards available to offset future taxable income, which expire in varying amounts from 2006 to 2023. Under the Tax Reform Act of 1986, the amounts of the benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year, include, but are not limited to, a cumulative ownership change of more than 50.0%, as defined over a three-year period.

Note 16: Employee Benefit Plans

Retirement and Deferred Savings Plan—United States of America

The Company maintains a retirement and deferred savings plan for its employees (the “401(k) Plan”). The 401(k) Plan is intended to qualify as a tax qualified plan under the Internal Revenue Code. The 401(k) Plan provides that each participant may contribute up to 15.0% of tax gross compensation (up to a statutory limit). Under the 401(k) Plan, the Company is required to make contributions based on contributions made by employees. The Company’s contributions to the 401(k) Plan for the years ended December 31, 2003, 2002 and 2001 were approximately $0.2 million in each year. All amounts contributed by participants and related earnings are fully vested at all times.

Severance Benefits—Korea

Employees and directors with more than one year of service are entitled to receive a lump-sum payment upon termination of their employment with ChipPAC Korea, based on their length of service and rate of pay at the time of termination. Accrued severance benefits are adjusted annually for all eligible employees based on their employment as of the balance sheet date.

ChipPAC, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In accordance with the National Pension Act of South Korea, a certain portion of severance benefits has been deposited with the Korean National Pension Fund and deducted from accrued severance benefits. The amounts contributed will be refunded to employees from the National Pension Fund upon retirement. The expense for severance benefits for the years ended December 31, 2003, 2002, and 2001 amounted to approximately $3.6 million, $3.8 million, and $2.6 million, respectively.

Note 17: Contingent Liabilities

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 the Company’s subsidiaries in Korea and Hungary. The prevailing tax treaty does not require withholding on the transactions in question. The Company has appealed the assessment through the NTS’s Mutual Agreement Procedure (“MAP”) and believes that the assessment will 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. The Company 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 on January 1, 2004, for the subsequent interest. The Company has 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.

Note 18: Acquisition of Cirrus Logic Test Assets

On June 30, 2003, the Company acquired the semiconductor test assets of Cirrus Logic, Inc. Pursuant to the Asset Purchase Agreement by and between the Company and Cirrus Logic, the Company has paid Cirrus Logic $3.5 million in cash. The terms of the acquisition of the Cirrus Logic semiconductor test assets also requires the Company to pay until June 30, 2007 additional contingent incentive payments to Cirrus Logic of up to approximately $3.8 million based on the achievement of certain milestones.

Note 19: Sale of Building

The Company sold a vacant building and land, located in its Malaysian facility to Texas Instruments Malaysia for total consideration of $5.4 million, net of expenses. The Company realized a gain of $3.9 million as a result of the sale.

Note 20: Supplemental Financial Statements of Guarantor/Non-Guarantor Entities

In connection with the recapitalization, in August 1999, ChipPAC International Company Limited, (“CP Int’l”), issued senior subordinated debt securities which are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis, by the parent company, ChipPAC, Inc. (“CPI”) and by ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Korea Company Limited (“CPK”), ChipPAC Malaysia Sdn. Bhd. (“CPM”), ChipPAC Luxembourg S.a.R.L., and ChipPAC Liquidity Management Hungary Limited Liability Company (the “Guarantor Subsidiaries”). All Guarantor Subsidiaries are wholly owned direct or indirect subsidiaries of CPI. ChipPAC Shanghai Limited (“CPS”) did not provide guarantees (the “Non-Guarantor Subsidiary”). The following is consolidated financial information for CP Int’l, CPI, CPM, and CPK, CPS, ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Luxembourg S.a.R.L., and ChipPAC Liquidity Management Hungary Limited Liability Company, segregated between the Guarantor and Non-Guarantor Subsidiaries.

ChipPAC, Inc.

SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEETS

December 31, 2003

(In thousands)


	Parent Guarantor CPI			Issuer CP Int’l			Other Guarantors			Non- Guarantor China			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	899		$	132		$	20,614		$	3,077		$	—		$	24,722
Short-term investments		30,036			—			4,950			—			—			34,986
Intercompany accounts receivable		191,333			23,223			23,310			17,687			(255,553	)		—
Accounts receivable, net		—			—			56,659			69			—			56,728
Inventories		—			—			21,424			4,636			—			26,060
Prepaid expenses and other current assets		1,190			38			3,932			2,251			—			7,411

Total current assets		223,458			23,393			130,889			27,720			(255,553	)		149,907
Property, plant and equipment, net		5,022			13,855			278,555			99,835			—			397,267
Intercompany loans receivable		—			200,880			—			—			(200,880	)		—
Investment in subsidiaries		64,095			—			87,677			—			(151,772	)		—
Intangible assets, net		1,339			—			14,142			379			—			15,860
Other assets		7,230			5,019			3,911			137			—			16,297

Total assets	$	301,144		$	243,147		$	515,174		$	128,071		$	(608,205	)	$	579,331

Liabilities and stockholders’ equity
Current liabilities:
Intercompany accounts payable	$	171		$	3,624		$	227,228		$	24,530		$	(255,553	)	$	—
Accounts payable		1,105			55			55,448			12,643			—			69,251
Accrued expenses and other current liabilities		4,825			8,970			8,955			4,974			—			27,724

Total current liabilities		6,101			12,649			291,631			42,147			(255,553	)		96,975
Long-term debt		—			165,000			—			—			—			165,000
Convertible subordinated notes		200,000			—			—			—			—			200,000
Intercompany loans payable		—			—			200,880			—			(200,880	)		—
Other long-term liabilities		—			—			22,313			—			—			22,313

Total liabilities		206,101			177,649			514,824			42,147			(456,433	)		484,288

Stockholders’ equity:
Common stock		972			—			—			—			—			972
Additional paid in capital		284,849			81,689			174,692			149,093			(405,474	)		284,849
Receivable from stockholders		(164	)		—			—			—			—			(164	)
Accumulated other comprehensive income		9,169			—			8,705			464			(9,169	)		9,169
Accumulated deficit		(199,783	)		(16,191	)		(183,047	)		(63,633	)		262,871			(199,783	)

Total Stockholders’ equity		95,043			65,498			350			85,924			(151,772	)		95,043

Total liabilities and stockholders’ equity	$	301,144		$	243,147		$	515,174		$	128,071		$	(608,205	)	$	579,331

ChipPAC, Inc.

SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS

Year ended December 31, 2003

(In thousands)


	Parent Guarantor CPI			Issuer CP Int’l			Other Guarantors			Non- Guarantor China			Eliminations			Consolidated
Intercompany revenue	$	26,572		$	2,141		$	—		$	72,929		$	(101,642	)	$	—
Customer revenue		—			—			429,031			158			—			429,189

Total revenue		26,572			2,141			429,031			73,087			(101,642	)		429,189
Cost of revenue		567			1,323			397,073			67,978			(101,642	)		365,299

Gross profit		26,005			818			31,958			5,109			—			63,890
Operating expenses:
Selling, general and administrative		21,417			286			13,051			3,487			—			38,241
Research and development		2,990			—			8,332			339			—			11,661
Restructuring, write-down of impaired assets and other charges		540			—			9,049			4,030			—			13,619

Total operating expenses		24,947			286			30,432			7,856			—			63,521

Operating income (loss)		1,058			532			1,526			(2,747	)		—			369
Non-operating (income) expenses
Intercompany interest expense		—			—			16,280			1,515			(17,795	)		—
Interest expense		7,135			23,447			305			—			—			30,887
Interest income		(624	)		—			(199	)		(5	)		—			(828	)
Intercompany interest income		—			(17,795	)		—			—			17,795			—
Loss from investment in Subsidiaries		23,168			—			4,150			—			(27,318	)		—
Foreign currency (gain) loss		(2	)		—			4			33			—			35
Loss from early debt extinguishment		—			1,099			83			—			—			1,182
Gain on sale of building		—			—			(3,929	)		—			—			(3,929	)
Other (income) expense, net		157			—			(214	)		(140	)		—			(197	)

Total non-operating expenses		29,834			6,751			16,480			1,403			(27,318	)		27,150

Loss before income taxes		(28,776	)		(6,219	)		(14,954	)		(4,150	)		27,318			(26,781	)
Provision for income taxes		5			320			1,675			—			—			2,000

Net loss	$	(28,781	)	$	(6,539	)	$	(16,629	)	$	(4,150	)	$	27,318		$	(28,781	)

ChipPAC, Inc.

SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS

Year Ended December 31, 2003

(In thousands)


	Parent Guarantor CPI			Issuer CP Int’l			Other Guarantors			Non- Guarantor China			Eliminations			Consolidated
Cash flows from operating activities:
Net loss	$	(28,781	)	$	(6,539	)	$	(16,629	)	$	(4,150	)	$	27,318		$	(28,781	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,023			1,323			52,438			15,306			—			70.090
Debt issuance cost amortization		936			1,280			—			—			—			2,216
Foreign currency (gain) loss		(2	)		—			4			33			—			35
Deferred Tax		—			—			(1,195	)		—			—			(1,195	)
Write-down of impaired assets		—			—			7,632			4,030			—			11,662
Loss from early debt extinguishment		—			1,099			83			—			—			1,182
Gain on sale of building		—			—			(3,929	)		—			—			(3,929	)
Gain on sale of equipment		(5	)		—			(226	)		(87	)		—			(318	)
Equity loss from investment in subsidiaries		23,168			—			4,150			—			(27,318	)		—
Changes in assets and liabilities:
Intercompany accounts receivable		(75,158	)		45,787			(145	)		(824	)		30,340			—
Accounts receivable		17			—			(17,899	)		(53	)		—			(17,935	)
Inventories		—			—			(9,329	)		(1,432	)		—			(10,761	)
Prepaid expenses and other current assets		(222	)		(38	)		(1,163	)		786			—			(2,209	)
Other assets		(1	)		—			(1,209	)		(126	)		—			(1,336	)
Intercompany accounts payable		(789	)		(56,597	)		87,250			476			(30,340	)		—
Accounts payable		(268	)		(1,898	)		28,719			2,943			—			29,496
Accrued expenses and other current liabilities		(451	)		(288	)		347			(1,284	)		—			(1,676	)
Other long-term liabilities		2			—			4,319			(33	)		—			4,288
Net cash provided by (used in) operating activities		(80,531	)		(15,871	)		133,218			14,013			—			50,829
Cash flows from investing activities:
Purchase of short-term investments		(198,616	)		—			(5,500	)		—			—			(204,116	)
Proceeds from sale of short-term investments		178,580			—			550			—			—			179,130
Acquisition of intangible assets		(1,147	)		—			(2,651	)		—			—			(3,798	)
Acquisition of property, plant and equipment		(6	)		(9,596	)		(104,644	)		(16,409	)		—			(130,655	)
Proceeds from sale of building		—			—			5,399			—			—			5,399
Proceeds from sale of equipment		5			—			668			113			—			786
Acquisition of test assets		—			—			(3,625	)		—			—			(3,625	)
Malaysian acquisition, net of cash and cash equivalents acquired		—			—			(3,475	)		—			—			(3,475	)
Investment in subsidiaries		(54,000	)		—			(34,000	)		—			88,000			—
Net cash used in investing activities		(75,184	)		(9,596	)		(147,278	)		(16,296	)		88,000			(160,354	)
Cash flows from financing activities:
Proceeds from revolving loans		—			26,500			1,204			—			—			27,704
Repayment of revolving loans		—			(26,500	)		(1,204	)		—			—			(27,704	)
Net proceeds from long-term debt		144,861			—			—			—			—			144,861
Repayment of long-term debt		—			(36,187	)		(16,700	)		—			—			(52,887	)
Increase in debt issuance costs		(180	)		—			—			—			—			(180	)
Intercompany loan payments		—			51,620			(17,620	)		(34,000	)		—			—
Intercompany capital contributions		—			—			54,000			34,000			(88,000	)		—
Repayment of notes from stockholders		316			—			—			—			—			316
Proceeds from common stock issuance		7,966			—			—			—			—			7,966
Repurchase of common stock		(2	)		—			—			—			—			(2	)
Net cash provided by financing activities		152,961			15,433			19,680			—			(88,000	)		100,074
Net increase (decrease) in cash and cash equivalents		(2,754	)		(10,034	)		5,620			(2,283	)		—			(9,451	)
Cash and cash equivalents at beginning of year		3,653			10,166			14,994			5,360			—			34,173
Cash and cash equivalents at end of year	$	899		$	132		$	20,614		$	3,077		$	—		$	24,722

ChipPAC, Inc.

SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEETS

December 31, 2002

(In thousands)


	Parent Guarantor CPI			Issuer CP Int’l			Other Guarantors			Non- Guarantor China			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	3,653		$	10,166		$	14,994		$	5,360		$	—		$	34,173
Short-term investments		10,000			—			—			—			—			10,000
Intercompany accounts receivable		116,175			69,010			23,165			16,863			(225,213	)		—
Accounts receivable, net		17			—			38,760			16			—			38,793
Inventories		—			—			12,095			3,204			—			15,299
Prepaid expenses and other current assets		968			—			2,852			1,465			—			5,285

Total current assets		130,813			79,176			91,866			26,908			(225,213	)		103,550
Property, plant and equipment, net		5,528			5,582			222,698			102,589			—			336,397
Intercompany loans receivable		—			252,500			—			—			(252,500	)		—
Investment in subsidiaries		33,263			—			57,827			—			(91,090	)		—
Intangible assets, net		703			—			16,018			579			—			17,300
Other assets		2,847			7,398			2,702			10			—			12,957

Total assets	$	173,154		$	344,656		$	391,111		$	130,086		$	(568,803	)	$	470,204

Liabilities and stockholders’ equity (deficit)
Current liabilities:
Intercompany accounts payable	$	960		$	60,221		$	139,978		$	24,054		$	(225,213	)	$	—
Accounts payable		1,373			1,953			26,729			9,700			—			39,755
Accrued expenses and other current liabilities		5,277			9,258			8,607			6,258			—			29,400

Total current liabilities		7,610			71,432			175,314			40,012			(225,213	)		69,155
Long-term debt, less current portion		—			201,187			16,700			—			—			217,887
Convertible subordinated notes		50,000			—			—			—			—			50,000
Intercompany loans payable		—			—			218,500			34,000			(252,500	)		—
Other long-term liabilities		—			—			17,618			—			—			17,618

Total liabilities		57,610			272,619			428,132			74,012			(477,713	)		354,660

Stockholders’ equity (deficit):
Common stock		941			—			—			—			—			941
Additional paid in capital		276,916			81,689			120,692			115,093			(317,474	)		276,916
Receivable from stockholders		(480	)		—			—			—			—			(480	)
Accumulated other comprehensive income		9,169			—			8,705			464			(9,169	)		9,169
Accumulated deficit		(171,002	)		(9,652	)		(166,418	)		(59,483	)		235,553			(171,002	)

Total Stockholders’ equity (deficit)		115,544			72,037			(37,021	)		56,074			(91,090	)		115,544

Total liabilities and stockholders’ equity	$	173,154		$	344,656		$	391,111		$	130,086		$	(568,803	)	$	470,204

ChipPAC, Inc.

SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS

Year ended December 31, 2002

(In thousands)


	Parent Guarantor CPI			Issuer CP Int’l			Other Guarantors			Non- Guarantor China			Eliminations			Consolidated
Revenue
Intercompany revenue	$	27,668		$	400		$	—		$	67,503		$	(95,571	)	$	—
Customer revenue		—			—			363,386			280			—			363,666

Revenue		27,668			400			363,386			67,783			(95,571	)		363,666
Cost of revenue		355			240			340,570			62,471			(95,571	)		308,065

Gross profit		27,313			160			22,816			5,312			—			55,601
Operating expenses:
Selling, general and administrative		22,666			212			11,397			3,884			—			38,159
Research and development		2,771			—			7,339			—			—			10,110
Restructuring, write-down of impaired assets and other charges		—			—			(661	)		—			—			(661	)

Total operating expenses		25,437			212			18,075			3,884			—			47,608

Operating income (loss)		1,876			(52	)		4,741			1,428			—			7,993
Non-operating (income) expenses
Interest expense		4,401			26,931			28,509			3,318			(31,173	)		31,986
Interest income		(404	)		(30,828	)		(543	)		(24	)		31,173			(626	)
Loss from investment in Subsidiaries		26,735			—			2,088			—			(28,823	)		—
Foreign currency loss		—			—			973			56			—			1,029
Loss from early debt extinguishment		—			3,005			—			—			—			3,005
Other (income) expense, net		(4	)		—			(358	)		(184	)		—			(546	)

Total non-operating expenses		30,728			(892	)		30,669			3,166			(28,823	)		34,848

Income (loss) before income taxes		(28,852	)		840			(25,928	)		(1,738	)		28,823			(26,855	)
Provision for income taxes		3			150			1,497			350			—			2,000

Net income (loss)	$	(28,855	)	$	690		$	(27,425	)	$	(2,088	)	$	28,823		$	(28,855	)

ChipPAC, Inc.

SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS

Year Ended December 31, 2002

(In thousands)


	Parent Guarantor CPI			Issuer CP Int’l			Other Guarantors			Non- Guarantor China			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(28,855	)	$	690		$	(27,425	)	$	(2,088	)	$	28,823		$	(28,855	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,448			240			43,608			13,653			—			58,949
Debt issuance cost amortization		380			1,901			—			—			—			2,281
Deferred taxes		—			—			(121	)		—			—			(121	)
Loss from early debt extinguishment		—			3,005			—			—			—			3,005
Foreign currency loss		—			—			973			56			—			1,029
(Gain) loss on sale of equipment		—			—			(88	)		38			—			(50	)
Equity loss from investment in subsidiaries		26,735			—			2,088			—			(28,823	)		—
Changes in assets and liabilities:
Intercompany accounts receivable		(57,071	)		16,848			(2,818	)		(4,697	)		47,738			—
Accounts receivable		13			11			(6,799	)		16			—			(6,759	)
Inventories		—			—			(2,413	)		(405	)		—			(2,818	)
Prepaid expenses and other current assets		(575	)		—			675			(870	)		—			(770	)
Other assets		304			—			(725	)		6			—			(415	)
Intercompany accounts payable		938			10,203			33,782			2,815			(47,738	)		—
Accounts payable		(808	)		1,204			5,114			3,200			—			8,710
Accrued expenses and other current liabilities		2,422			(2,064	)		779			425			—			1,562
Other long-term liabilities		—			—			3,854			(56	)		—			3,798

Net cash provided by (used in) operating activities		(55,069	)		32,038			50,484			12,093			—			39,546

Cash flows from investing activities:
Purchase of short-term investments		(39,699	)		—			—			—			—			(39,699	)
Proceeds from sale of short-term investments		29,699			—			—			—			—			29,699
Acquisition of intangible assets		(527	)		—			(2,768	)		(67	)		—			(3,362	)
Acquisition of property, plant and equipment		(218	)		(5,822	)		(57,246	)		(15,624	)		—			(78,910	)
Proceeds from sale of equipment		—			—			488			—			—			488
Malaysian acquisition, net of cash and cash equivalents acquired		—			—			(6,643	)		—			—			(6,643	)
Investment in subsidiaries		(100,000	)		—			(6,960	)		—			106,960			—

Net cash used in investing activities		(110,745	)		(5,822	)		(73,129	)		(15,691	)		106,960			(98,427	)

Cash flows from financing activities:
Proceeds from revolving loans and other line of credit		—			100,000			5,596			—			—			105,596
Repayment of revolving loans and other line of credit		—			(150,000	)		(5,596	)		—			—			(155,596	)
Net proceeds from long-term debt		—			—			16,700			—			—			16,700
Repayment of long-term debt		—			(82,440	)		—			—			—			(82,440	)
Increase in debt issuance costs		—			(703	)		—			—			—			(703	)
Intercompany loan payments		—			100,000			(100,000	)		—			—			—
Intercompany capital contributions		—			—			100,000			6,960			(106,960	)		—
Repayment of notes from stockholders		505			—			—			—			—			505
Proceeds from common stock issuance		167,144			—			—			—			—			167,144
Repurchase of common stock		(24	)		—			—			—			—			(24	)

Net cash provided by financing activities		167,625			(33,143	)		16,700			6,960			(106,960	)		51,182

Net increase (decrease) in cash and cash equivalents		1,811			(6,927	)		(5,945	)		3,362			—			(7,699	)
Cash and cash equivalents at beginning of year		1,842			17,093			20,939			1,998			—			41,872

Cash and cash equivalents at end of year	$	3,653		$	10,166		$	14,994		$	5,360		$	—		$	34,173

ChipPAC, Inc.

SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS

Year ended December 31, 2001

(In thousands)


	Parent Guarantor CPI			Issuer CP Int’l			Other Guarantors			Non- Guarantor China			Eliminations			Consolidated
Revenue
Intercompany revenue	$	27,168		$	—		$	—		$	56,338		$	(83,506	)	$	—
Customer revenue		—			—			328,693			8			—			328,701

Revenue		27,168			—			328,693			56,346			(83,506	)		328,701
Cost of revenue		23			—			328,732			52,339			(83,506	)		297,588

Gross profit		27,145			—			(39	)		4,007			—			31,113
Operating expenses:
Selling, general and administrative		19,378			303			8,127			3,391			—			31,199
Research and development		4,364			—			9,859			—			—			14,223
Restructuring, write-down of impaired assets and other charges		1,760			—			36,855			2,305			—			40,920

Total operating expenses		25,502			303			54,841			5,696			—			86,342

Operating income (loss)		1,643			(303	)		(54,880	)		(1,689	)		—			(55,229	)
Non-operating (income) expenses
Interest expense		2,249			34,963			31,065			3,440			(34,503	)		37,214
Interest income		(146	)		(34,523	)		(439	)		(83	)		34,503			(688	)
Loss from investment in
Subsidiaries		89,413			—			4,983			—			(94,396	)		—
Foreign currency gains		—			—			(156	)		(31	)		—			(187	)
Other (income) expense, net		23			—			(401	)		(32	)		—			(410	)

Total non-operating expenses		91,539			440			35,052			3,294			(94,396	)		35,929

Loss before income taxes		(89,896	)		(743	)		(89,932	)		(4,983	)		94,396			(91,158	)
Provision for (benefit from) income taxes		3,840			1,104			(2,366	)		—			—			2,578

Net loss	$	(93,736	)	$	(1,847	)	$	(87,566	)	$	(4,983	)	$	94,396		$	(93,736	)

ChipPAC, Inc.

SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS

Year Ended December 31, 2001

(In thousands)


	Parent Guarantor CPI			Issuer CP Int’l			Other Guarantors			Non- Guarantor China			Eliminations			Consolidated
Cash flows from operating activities:
Net loss	$	(93,736	)	$	(1,847	)	$	(87,566	)	$	(4,983	)	$	94,396		$	(93,736	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,821			—			48,211			9,877			—			59,909
Debt issuance cost amortization		160			1,952			—			—			—			2,112
Deferred tax		1,636			—			—			—			—			1,636
Write-down of impaired assets		—			—			32,383			2,305			—			34,688
Foreign currency gains		—			—			(156	)		(31	)		—			(187	)
(Gain) loss on sale of equipment		112			—			(116	)		3			—			(1	)
Equity income from investment in subsidiaries		89,413			—			4,983			—			(94,396	)		—
Changes in assets and liabilities:
Intercompany accounts receivable		(51,042	)		(66,805	)		5,039			(3,862	)		116,670			—
Accounts receivable		15			(12	)		13,879			(12	)		—			13,870
Inventories		—			—			8,190			579			—			8,769
Prepaid expenses and other current assets		14			—			(212	)		2,403			—			2,205
Other assets		465			—			2,973			(572	)		—			2,866
Intercompany accounts payable		22			47,529			75,360			(6,241	)		(116,670	)		—
Accounts payable		1,172			749			(25,638	)		99			—			(23,618	)
Accrued expenses and other current liabilities		3,332			1,951			(17,649	)		447			—			(11,919	)
Other long-term liabilities		(240	)		—			(162	)		(108	)		—			(510	)

Net cash provided by (used in) operating activities		(46,856	)		(16,483	)		59,519			(96	)		—			(3,916	)

Cash flows from investing activities:
Acquisition of intangible assets		—			—			(6,156	)		—			—			(6,156	)
Acquisition of property, plant and equipment		(4,847	)		—			(29,968	)		(11,577	)		—			(46,392	)
Proceeds from sale of equipment		1,731			—			8,162			(8,928	)		—			965
Malaysian acquisition, net of cash and cash equivalents acquired		—			—			(7,399	)		—			—			(7,399	)
Investment in subsidiaries		—			—			(18,540	)		—			18,540			—

Net cash used in investing activities		(3,116	)		—			(53,901	)		(20,505	)		18,540			(58,982	)

Cash flows from financing activities:
Proceeds from revolving loans		—			84,633			—			—			—			84,633
Repayment of revolving loans		—			(49,234	)		—			—			—			(49,234	)
Net proceeds from long-term debt		51,340			27,745			—			—			—			79,085
Repayment of long-term debt		—			(28,857	)		—			—			—			(28,857	)
Increase in debt issuance costs		(4,520	)		—			—			—			—			(4,520	)
Intercompany loan payments		—			—			—			18,540			(18,540	)		—
Repayment of notes from stockholders		520			—			—			—			—			520
Proceeds from common stock issuance		4,312			—			—			—			—			4,312
Repurchase of common stock		(19	)		—			—			—			—			(19	)

Net cash provided by financing activities		51,633			34,287			—			18,540			(18,540	)		85,920

Net increase (decrease) in cash and cash equivalents		1,661			17,804			5,618			(2,061	)		—			23,022
Cash and cash equivalents at beginning of year		181			(711	)		15,321			4,059			—			18,850

Cash and cash equivalents at end of year	$	1,842		$	17,093		$	20,939		$	1,998		$	—		$	41,872

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

Not Applicable.

ITEM 9A. CONTROLS

AND PROCEDURES

Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as this term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART III

ITEM 10. DIRECTORS

AND EXECUTIVE OFFICERS OF THE REGISTRANT

Board of Directors

ChipPAC’s board of directors consists of eight directors, seven of whom are not employees of the company. All seven of our non-employee directors meet Nasdaq’s current independence requirements. The following table shows basic information about each current director:


Name	Age*	Principal Occupation During Last Five Years	Director Since
Dennis P. McKenna	54	Chairman of the Board of Directors since April 2001, and President and Chief Executive Officer since October 1997, when ChipPAC was initially incorporated. From October 1995 to October 1997, he served as Senior Vice President of the Components group for Hyundai Electronics America, and from January 1993 to October 1995 was Vice President and General Manager of Hyundai’s Semiconductor Group.	1997

*	Age at December 31, 2003, the last day of our fiscal year.


Name	Age*	Principal Occupation During Last Five Years	Director Since
Edward Conard	47	Managing Director of Bain Capital, Inc. since 1993. Mr. Conard is a director of Waters Corporation, Alliance Commercial Laundries, Inc., U.S. Synthetics, Inc., Broder Brothers, Inc. and Unisource Worldwide, Inc.	1999

Robert W. Conn	61	Managing Director of Enterprise Partners Venture Capital since July 2002. Dr. Conn served as Dean of the Jacobs School of Engineering, University of California, San Diego, from 1994 to 2002. From 1980 to 1994, Dr. Conn served as Professor of Engineering and Applied Science at the University of California, Los Angeles, where he was founding director of the Institute of Plasma and Fusion Research. Dr. Conn co-founded a semiconductor equipment company in 1986, Plasma & Materials Technologies, now Trikon Technologies, and was Chairman of the Board through 1993. Dr. Conn is a member of the National Academy of Engineering, and served in 1997 and 1998 as a member of the President’s Committee of Advisors on Science and Technology Panel on Energy R&D Policy for the 21st Century. Dr. Conn is a director of Intersil Corporation, and serves on Intersil’s compensation and nominating committees.	2002

Michael A. Delaney	49	Managing Director of Citigroup Venture Capital Equity Partners (and formerly with its affiliate Citicorp Venture Capital, Ltd.) since 1995 and a vice president for more than the past five years. Mr. Delaney is Vice President of Court Square. Mr. Delaney is a director of Delco Remy International, Inc., Palomar Technological Companies, MSX International, FastenTech, Inc., and ERICO International and Strategic Industries, and serves in an audit committee capacity in these companies.	1999

Marshall Haines	36	Principal of Texas Pacific Group since March 2004. Mr. Haines was a Principal of Bain Capital from 2000 to 2004. Mr. Haines joined Bain Capital in 1993 as an associate. Mr. Haines is a director of TravelCLICK, Inc.	1999

R. Douglas Norby	68	Senior Vice President and Chief Financial Officer of Tessera Technologies, Inc. since July 2003. Mr. Norby worked as a consultant for Tessera from May to July 2003, prior to which he was a private investor. Mr. Norby was Vice President and Chief Financial Officer of Zambeel, Inc. from March 2002 to February 2003. From 2000 to March 2002, Mr. Norby was Senior Vice President and Chief Financial Officer of Novalux, Inc., and from 1996 to 2000, he was Executive Vice President and Chief Financial Officer of LSI Logic Corporation. Mr. Norby is a director of LSI Logic Corporation and Alexion Pharmaceuticals, Inc., and serves as the Chairman of Alexion’s audit committee.	2002

Audit Committee

Our audit committee was established in August 2000. Current members of the audit committee are Mr. Norby and Drs. Park and Conn, all of whom qualify as independent directors under the SEC’s and Nasdaq’s new independence standards. This committee reports to the board regarding our independent public accountants, the scope and results of our annual audits, compliance with our accounting and financial policies and management’s procedures and policies relative to the adequacy of our internal accounting controls. The committee is responsible for the appointment, compensation and oversight of the company’s outside accounting firm, and for the pre-approval of audit services and permissible non-audit services. The independent auditors report directly to the audit committee. The committee approves all related party transactions, and has the authority to engage independent counsel and other outside advisors. The audit committee currently meets Nasdaq’s size, independence and experience requirements. Mr. Norby serves as Chairman of the audit committee and qualifies as a “financial expert” under the standards of the SEC.

Executive Officers

Name and Title

Age*

Position Held During Last Five Years

Dennis P. McKenna

Chairman, Chief Executive Officer and President

Chairman of the Board of Directors since April 2001, and President and Chief Executive Officer since October 1997, when ChipPAC was initially incorporated. From October 1995 to October 1997, he served as Senior Vice President of the Components group for Hyundai America, and from January 1993 to October 1995 was Vice President and General Manager of Hyundai’s Semiconductor Group.


Name and Title	Age*	Position Held During Last Five Years
Robert Krakauer Executive Vice President, Corporate Operations, Chief Financial Officer	37	Executive Vice President of Corporate Operations and Chief Financial Officer since November 2003. Prior to this, he served as Senior Vice President and Chief Financial Officer from November 1999 to November 2003. Mr. Krakauer served as Vice President, Finance and Chief Financial Officer at AlliedSignal Electronic Materials from May 1998 to November 1999. From June 1996 to May 1998, he was Corporate Controller at Altera Corporation, and from June 1993 to June 1996, he was Vice President Finance and Chief Financial Officer at Alphatec Electronics, USA.

Patricia H. McCall Senior Vice President, General Counsel and Secretary	49	Senior Vice President, General Counsel and Secretary since January 2003, prior to which Ms. McCall served as Senior Vice President Administration, General Counsel and Secretary from November 2000. From November 1995 to November 2000, Ms. McCall was at National Semiconductor Corporation, most recently as Associate General Counsel. Prior to that, she was a partner at the law firm of Pillsbury, Madison & Sutro, and a Barrister in England.

Other Named Executives


Name and Title	Age*	Position Held During Last Five Years
Jeffrey Braden Vice President, Strategic Operations	51	Vice President, Strategic Operations since September 2003. From February 2001 to September 2003, Mr. Braden was Vice President, Product Line Management. From September 2000 to February 2001, Mr. Braden was Vice President Leadframe Products, and joined ChipPAC in June 1999 as Business Director of Leadframe Products. Mr. Braden served as Vice President and General Manager at Olin Interconnect Technologies from 1992 to 1998.

Bret Zahn Vice President, Design and Characterization	35	Vice President, Worldwide Design and Characterization since December 2000, prior to which Mr. Zahn served as Director, North American Design and Characterization from April 1998. From June 1992 to April 1998, Mr. Zahn was at Motorola Semiconductor Products Sector. Prior to that, he held positions at Lockheed Aeronautical Systems Group and Rockwell International Corporation.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, as well as persons owning over 10% of our Class A common stock, to file reports of ownership and changes in ownership of our stock with the Securities and Exchange Commission. Copies of these reports must also be provided to the company. Based upon a review of the copies of those reports provided to us, and written representations that no other reports were required to be filed, we believe that all reporting requirements under Section 16(a) for our directors, executive officers and those owning over 10% of the common stock, for fiscal year ended December 31, 2003, were complied with.

Code of Ethics

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, controller and persons performing similar functions as well as to all of our employees. A copy of this code of ethics will be available without charge to anyone who requests it by writing to Investor Relations, 47400 Kato Road, Fremont, California, 94538 or calling 510-979-8000.

ITEM 11. EXECUTIVE COMPENSATION.

Executive Compensation

Executive officers of the company are elected by and serve at the discretion of the board. Currently, and at the end of 2003, we had three executive officers, our chief executive officer, executive vice president of corporate operations (acting chief financial officer) and general counsel. The following table shows information concerning the compensation paid or accrued for the fiscal years ended December 31, 2001, 2002 and 2003 for our chief executive officer, our two other executive officers and the two employees who were the next most highly compensated employee as of the end of 2003, to whom we refer collectively as the “named executives.”

Summary Compensation Table


		Annual Compensation					Long-Term Compensation
Name and Principal Position	Year	Salary			Bonus(3)		Securities Underlying Options/SARS (#)	All Other Compensation ($)
Dennis P. McKenna	2003	$	390,009		$	269,120	300,000	$	22,839	(4)
President and Chief	2002		400,015			420,480	—		1,272,255	(5)
Executive Officer	2001		390,015	(2)		—	450,000		22,255	(6)

Robert Krakauer	2003		268,135			168,014	120,000		6,484	(4)
Executive Vice President,	2002		231,394			154,395	—		254,496	(5)
Corporate Operations (acting Chief Financial Officer)	2001		229,134	(2)		—	216,000		5,542	(6)

Patricia H. McCall	2003		219,381			152,766	60,000		5,858	(4)
Senior Vice President,	2002		250,010			262,800	—		4,748	(5)
General Counsel and Secretary	2001		243,759	(2)		100,000	135,000		3,225	(6)

Jeffrey Braden (1)	2003		195,005			55,160	65,000		5,524	(4)
Vice President, Product	2002		200,008			83,840	—		5,108	(5)
Line Management	2001		175,507	(2)		19,450	105,000		4,528	(6)

Bret Zahn (1)	2003		202,805			51,389	30,000		6,382	(4)
Vice President, Worldwide	2002		200,008			64,620	—		5,837	(5)
Design and Characterization	2001		195,008			17,268	60,000		5,411	(6)

(1)	Messrs. Braden and Zahn are not serving as executive officers of the company, but are included on this table because they are the next most highly compensated employees after the executive officers.

(2)	For the third quarter of 2001, on account of the industry downturn, the salaries of vice presidents and above were reduced by 10%.

(3)

The bonuses reflect amounts paid under the company’s Short Term Incentive Plan. Bonuses recorded for 2003 reflect amounts paid in 2004 for the executive’s performance in 2003; bonuses recorded for 2002 reflect amounts paid in 2003 for the executive’s performance in 2002; bonuses recorded for 2001, reflect amounts paid in 2002 for performance in 2001. Ms. McCall received a guaranteed bonus for 2001 based on her employment agreement.

(4)

Includes amounts contributed in 2003 (a) under our 401(k) plan as follows: Mr. McKenna—$5,333; Mr. Krakauer—$6,000; Ms. McCall—$5,156; Mr. Braden—$4,588; and Mr. Zahn—$6,000 and (b) for premiums for a life insurance policy as follows: Mr. McKenna—$1,242; Mr. Krakauer—$481; Ms. McCall—$702; Mr. Braden—$936 and Mr. Zahn—$382.

(5)	Includes amounts contributed in 2002 (a) under our 401(k) plan as follows: Mr. McKenna—$4,750; Mr. Krakauer—$4,041; Ms. McCall—$3,938; Mr. Braden—$4,139; and Mr. Zahn—$5,500 (b) for premiums

for a life insurance policy as follows: Mr. McKenna—$17,505; Mr. Krakauer—$455; Ms. McCall—$810; Mr. Braden—$969 and Mr. Zahn—$337. Also includes unsecured loans forgiven in February 2002 in the amount of $1,250,000 for Mr. McKenna and $250,000 for Mr. Krakauer, in consideration for their efforts in completing the financial restructuring in 2001.

(6)

Includes amounts contributed in 2001 (a) under our 401(k) plan as follows: Mr. McKenna—$4,750; Mr. Krakauer—$5,100; Ms. McCall—$2,437; Mr. Braden—$3,984; and Mr. Zahn—$5,083 and (b) for premiums for a life insurance policy as follows: Mr. McKenna—$17,505; Mr. Krakauer—$442; Ms. McCall—$788; Mr. Braden—$544 and Mr. Zahn—$327.

Option Grants In Last Fiscal Year

The following table shows information regarding stock options granted by the company to the named executives during our last fiscal year:


Name	Number of Securities Underlying Options Granted (1)	% of Total Options Granted to Employees in Fiscal Year		Exercise or Base Price ($/Share)		Expiration Date	Potential Realizable Value at Assumed Annual Rate of Stock Price Appreciation for Option Term (2)
Name	Number of Securities Underlying Options Granted (1)	% of Total Options Granted to Employees in Fiscal Year		Exercise or Base Price ($/Share)		Expiration Date	5%($)		10%($)
Dennis P. McKenna	300,000	11.2	%	$	2.55	Mar. 17, 2013	$	481,104	$	1,219,213
Robert Krakauer	120,000	4.5	%		2.55	Mar. 17, 2013		192,442		487,685
Patricia H. McCall	60,000	2.2	%		2.55	Mar. 17, 2013		96,221		243,843
Jeff Braden	65,000	2.4	%		2.55	Mar. 17, 2013		104,239		264,163
Bret Zahn	30,000	1.1	%		2.55	Mar. 17, 2013		48,110		121,921

(1)

These options for Class A common stock were granted under the ChipPAC, Inc. 2000 Equity Incentive Plan. Twenty percent of the options vests at the end of the first year, an additional twenty percent vests at the end of the second year, an additional thirty percent vests at the end of the third year and the remaining thirty percent vests at the end of the fourth year.

(2)	Amounts reflect assumed rates of appreciation set forth in the executive compensation disclosures rules of the SEC. Actual gains, if any, on stock option exercises depend on future performance of our stock and overall market conditions.

Option Exercises in Last Fiscal Year and Fiscal Year End Option Values

The following table contains information regarding unexercised options held by the named executives as of December 31, 2003. The value of “in-the-money” options represents the difference between the exercise price of an option and the fair market value of our Class A common stock as of December 31, 2003. No options were exercised by the named executives during the year ended December 31, 2003.


	Number of Securities Underlying Unexercised Options at Fiscal Year-End (#)	Value of Unexercised In-the-Money Options at Fiscal Year-End ($)
Name	Exercisable/ Unexercisable	Exercisable/ Unexercisable
Dennis P. McKenna	775,272 / 799,800	$3,157,806 / $2,563,656
Robert Krakauer	265,447 / 349,800	$1,061,852 / $1,027,104
Patricia H. McCall	169,000 / 186,000	$ 851,800 / $ 625,200
Jeffrey Braden	100,715 / 95,000	$ 445,333 / $ 420,650
Bret Zahn	52,810 / 150,714	$ 258,795 / $ 615,134

Employment Agreements

Mr. McKenna

Mr. McKenna is employed under an employment agreement with us that provides that Mr. McKenna will serve as our President and Chief Executive Officer. The initial term of the agreement terminated on December 31, 2001 and automatically renews for successive one-year periods unless either party notifies the other of his or our intention not to renew the agreement. Under the agreement, we pay Mr. McKenna a base salary of $400,000 per year, which may be increased if approved by the board of directors, plus a bonus of up to 80% of his base salary upon attainment by us of financial performance targets described in the agreement. The agreement also provides for customary fringe benefits.

We have agreed to pay Mr. McKenna a bonus equal to twice his base salary plus a portion of his annual bonus if we terminate Mr. McKenna for any reason other than cause, or if Mr. McKenna terminates his employment for good reason. If Mr. McKenna dies before the end of his employment period, we will pay his estate a pro rated portion of the bonus he would have earned in the year of his death.

The agreement also provides that, should Mr. McKenna continue to serve as President and Chief Executive Officer following a change of our control, the provisions of the employment agreement shall remain in force and effect following the change of control.

Separation agreement with Mr. McKenna. In connection with our proposed merger with STATS, ChipPAC, STATS and Mr. McKenna entered into a separation agreement, which will not become effective unless and until the merger is consummated, pursuant to which Mr. McKenna has agreed to resign from his position as President and Chief Executive Officer of ChipPAC and to relinquish his position as a member of the ChipPAC board of directors. STATS has agreed to nominate Mr. McKenna to serve, effective as of the consummation of the merger, as Vice Chairman of the STATS board of directors for a term to continue through December 31, 2004. Mr. McKenna is required to resign as a member, and from his position as Vice Chairman, of the STATS board of directors on and effective as of December 31, 2004.

In consideration of covenants agreed to by Mr. McKenna under his separation agreement, including his resignation from his position as President and Chief Executive Officer of ChipPAC and his execution and delivery of a general release against ChipPAC, STATS and their affiliates, Mr. McKenna will be eligible to receive the following payments and benefits from ChipPAC, subject to the terms and conditions of the separation agreement:

•

a lump sum payment in an amount equal to three times his annual salary and target bonus;

•

full vesting and immediate exercisability of his outstanding options and exercisability of these vested option for one year following the effective date of the merger; and

•

funding in full of his current term life insurance policy and payment of the cost of his medical and dental insurance premiums for a maximum period of three years, with a maximum payment to him of these insurance policies and premiums of $150,000.

Under his separation agreement, Mr. McKenna has agreed not to compete with STATS or ChipPAC, not to solicit any employees of ChipPAC and not to interfere with any business relations of STATS or ChipPAC for a period of 24 months immediately following the completion of the merger.

Messrs. Krakauer, Braden, Zahn and Ms. McCall

Messrs. Krakauer, Braden, Zahn and Ms. McCall are employed under letter agreements with us which provide that they are employees-at-will and that either party has the right to terminate the employment relationship at any time with or without cause.

Mr. Krakauer’s letter agreement provides that he serves as Executive Vice President Corporate Operations and Chief Financial Officer. Mr. Krakauer’s current base salary is $275,000. In addition to his base salary, Mr. Krakauer is eligible to earn an annual bonus targeted at 80% of his base salary. Prior to this, he served as Senior Vice President and Chief Financial Officer, with the same salary and bonus target. Prior to 2003, Mr. Krakauer’s base salary was $235,000 with an annual bonus targeted at 50% of his base salary. For 2000 only, he was guaranteed a minimum bonus of 35% of target. In the event of termination by us for reasons other than cause, he is eligible to receive eight months of severance. This severance amount may be reduced by any other employment compensation he receives from another company during that eight-month period.

Ms. McCall’s letter agreement provides that she serves as Senior Vice President, General Counsel and Secretary. Ms. McCall’s current base salary is $225,000. Prior to 2003, Ms. McCall served as Senior Vice President Administration, General Counsel and Secretary, with a base salary of $250,000. In addition to her base salary, Ms. McCall is eligible to earn an annual bonus targeted at 80% of her base salary. For 2000 only, she received a $25,000 sign-on bonus and was guaranteed a minimum bonus of 100% of target prorated from her hire date, and for 2001 a minimum bonus of 50% of target. In the event of termination by us for reasons other than cause, she is eligible to receive eight months of severance. This severance amount may be reduced by any other employment compensation she receives from another company during that eight-month period. The agreement also provides that, should Ms. McCall continue to serve as Senior Vice President and General Counsel following a change of our control, the provisions of the employment agreement shall remain in force and effect following the change of control.

Mr. Braden’s letter agreement provides that he serves as Vice President, Product Line Management. Mr. Braden’s current base salary is $200,000. In addition to his base salary, Mr. Braden is eligible to earn an annual bonus targeted at 40% of his base salary. In 2001, Mr. Braden’s base salary was $180,000 with an annual bonus targeted at 40% of his base salary, and in 2000 his base salary increased from $132,500 to $180,000 due to promotions, with his annual bonus target increasing from 30% to 40% of his base salary during the course of the year.

Mr. Zahn’s letter agreement provides that he serves as Vice President of Worldwide Design and Characterization. His current base salary is $200,000. In addition to his base salary, Mr. Zahn is eligible to earn an annual bonus targeted at 30% of his base salary. Mr. Zahn received a retention bonus of $50,000 when he signed his employment letter agreement.

Messrs. Krakauer’s, Braden’s, Zahn’s and Ms. McCall’s letter agreements also provide for customary benefits.

Employee Retention and Severance Plan

In connection with our proposed merger with STATS, our board adopted an Employee Retention and Severance Plan which provides for certain payments and benefits for our employees if the merger is completed. The plan administrator, after consultation with our senior management, shall have the sole discretion to determine which employees will receive benefits in what amounts under the plan. All full-time employees who are working for us at the time of the merger are eligible to receive benefits in the administrator’s discretion. If an employee receives any payments under this plan, the employee will not be entitled to any further or additional retention or change of control payments or benefits from the company or its successor.

Participants will be required to continue to be employed by the company at the closing of the merger with STATS in order to receive benefits under the plan. In no event will any benefits be paid to any participant unless and until such closing occurs.

Participants eligible to receive severance benefits will receive a severance payment, and ChipPAC will pay such participants’ COBRA health care continuation coverage for a period of time. In addition, the ChipPAC stock options held by participants eligible for severance benefits under the plan, other than options granted on or after January 1, 2004, will become fully exercisable upon the consummation of the merger.

Participants eligible to receive retention benefits will receive a retention payment, payable either on the date of their termination soon after the merger, or, in the case of participants whose employment will continue long-term with the combined company, payable in three installments over a two-year period following consummation of the merger.

The maximum aggregate amount payable to all participants under the Employee Retention and Severance Plan will in no event exceed $5 million.

Director Compensation

We reimburse members of the board of directors for any out-of-pocket expenses incurred by them in connection with services provided in this capacity. Otherwise, employees of our company serving on the board of directors are not entitled to receive any compensation for serving on the board. Directors who are not our employees and are not otherwise affiliated with us or with our principal stockholders may receive compensation that is commensurate with arrangements offered to directors of companies that are similar to our company. As a result, we compensate Drs. Conn and Park and Mr. Norby for their services as directors. The fees are currently as follows:

•

$20,000 initial fee upon appointment to the board and annual retainer fee;

•

$2,500 for in-person attendance at each board meeting;

•

$1,250 for telephonic participation at each board meeting;

•

$1,000 for attendance at each committee meeting.

We also grant options to Drs. Conn and Park and Mr. Norby to purchase shares of our Class A common stock. We currently provide for an initial option grant of 20,000 shares upon appointment to the board and annual option grants of 15,000 shares.

Compensation Committee Interlocks and Insider Participation

The compensation committee of the board was established in August 2000 in connection with our initial public offering. Current members of the compensation committee are Messrs. Haines and Schorr and Dr. Park. The members of the compensation committee during 2003 were Messrs. Haines and Schorr.

During 2003, no compensation committee member was an officer or employee of the company or its subsidiaries, or formerly an officer, nor had any relationship otherwise requiring disclosure under the rules of the Securities and Exchange Commission. No executive officer of the company served as a member of the compensation committee of, or as a director of, any company where an executive officer of that company is a member of our board of directors or compensation committee. The members of the compensation committee thus do not have any compensation committee interlocks or insider participation. Certain relationships and related transactions that may indirectly involve our board members are reported below.

The compensation arrangements for each of our executive officers were established under the terms of the respective employment agreements between us and each executive officer. The terms of the employment agreements were established in arms-length negotiations between us and each executive officer and approved by our board of directors, except that the agreement relating to Mr. McKenna was negotiated between representatives of our primary investors at the time and Mr. McKenna. Any changes in the compensation arrangements of our executive officers will be determined by the compensation committee of our board of directors.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table below sets forth certain information regarding the beneficial ownership of our Class A common stock as of February 10, 2004 by:

•

each person or group of affiliated persons who is known by us to beneficially own five percent or more of our Class A common stock;

•

each director, our chief executive officer and each of our four other highest paid executive officers (or others included as named executives in this annual report) at the end of 2003; and

•

all directors and executive officers as a group.

The table includes the number of shares and percentage ownership represented by the shares determined to be beneficially owned by a person under the rules of the Securities and Exchange Commission. The number of shares beneficially owned by a person includes: (a) shares of Class A common stock that are subject to options held by that person that are currently exercisable within 60 days of February 10, 2004 and (b) shares of Class A common stock that are subject to repurchase but vest within 60 days of February 10, 2004.

These shares are deemed outstanding for the purpose of computing the percentage of outstanding shares owned by that person. These shares are not deemed outstanding, however, for the purposes of computing the percentage ownership of any other person.

Unless otherwise stated, each of the persons named in the table has sole or shared voting and investment power with respect to the securities beneficially owned.

Principal Stockholders Table


	Shares Beneficially Owned
Name and Address	Number of Shares	Percentage of Shares Outstanding
Principal Stockholders:
Bain Capital Funds(1)	6,260,397	6.4	%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116

Citicorp Venture Capital, Ltd. (2)	15,794,168	16.2	%
399 Park Avenue
New York, NY 10043

ST Assembly Test Services, Ltd (3)	18,167,837	18.7	%
5 Yishun Street 23
Singapore 768442

Directors and Named Executives:
Dennis P. McKenna	1,268,026	1.3	%
Robert Krakauer	581,247	*
Patricia H. McCall	226,164	*
Jeffrey Braden	143,865	*
Bret Zahn	77,335	*
Edward Conard (4)	6,260,397	6.4	%
Robert W. Conn	35,000	*
Michael A. Delaney (5)	9,388,310	9.7	%
Marshall Haines (6)	6,260,397	6.4	%
R. Douglas Norby	35,000	*
Chong Sup Park	38,215	*
Paul C. Schorr, IV (7)	9,153,995	9.4	%
All directors and named executives as a group (12 persons)	18,053,559	18.6	%

*	Less than one percent.

(1)

The information concerning shares beneficially owned has been derived from an Amendment No. 5 to a Schedule 13G dated February 10, 2004 and includes: (a) 4,674,173 shares of Class A common stock owned by Bain Capital Fund VI, L.P., whose sole general partner is Bain Capital Partners VI, L.P., whose sole general partner is Bain Capital Investors, LLC, a Delaware limited liability company; (b) 625,444 shares of Class A common stock owned by BCIP Associates II, whose managing general partner is Bain Capital Investors, LLC, a Delaware limited liability company; (c) 114,271 shares of Class A common stock owned by BCIP Associates II-B, whose managing general partner is Bain Capital Investors, LLC, a Delaware limited liability company; (d) 217,144 shares of Class A common stock owned by BCIP Trust Associates II, L.P., whose managing general partner is Bain Capital Investors, LLC, a Delaware limited liability company; (e) 56,156 shares of Class A common stock owned by BCIP Trust Associates II-B, whose managing general partner is Bain Capital Investors, LLC, a Delaware limited liability company; (f) 242,832 shares of Class A common stock owned by BCIP Associates II-C, whose managing general partner is Bain Capital Investors, LLC, a Delaware limited liability company; (g) 15,582 shares of Class A common stock owned by PEP Investments Pty, Ltd., a New South Wales, Australia Limited company; (h) 131,461 shares of Class A common stock owned by Sankaty High Yield Asset Partners, L.P., a Delaware limited partnership; and (i) 183,334 shares of Class A common stock owned by Bain Capital, L.L.C.

(2)

The information concerning shares beneficially owned has been derived from an Amendment No. 4 to a Schedule 13D dated February 10, 2004, filed jointly by Citicorp Mezzanine III, L.P., Citicorp Capital Investors, Limited, Citicorp Venture Capital, Ltd., Citibank, N.A., Citicorp, Citigroup Holdings Company

and Citigroup Inc., some of which have shared voting and dispositive powers as to the shares of Class A common stock owned by Citicorp Venture Capital, Ltd. Includes 9,153,995 shares of Class A common stock owned by Citicorp Venture Capital, Ltd., 1,615,411 shares of Class A common stock held by an affiliate of Citicorp Venture Capital, Ltd. for which Citicorp Venture Capital, Ltd. disclaims beneficial ownership, 5,020,081 shares of Class A common stock issuable upon the exercise of our 8% convertible subordinated debentures due 2011 and held by Citicorp Mezzanine III, L.P. for which Citicorp Venture Capital, Ltd. disclaims beneficial interest and 4,681 shares of Class A common stock held by a wholly-owned subsidiary of Citigroup Inc. for which Citicorp Venture Capital, Ltd. disclaims beneficial interest.

(3)

The information concerning shares beneficially owned has been derived from a Schedule 13D dated February 10, 2004, filed jointly by Temasek Holdings (Private) Limited, Singapore Technologies Pte Ltd., Singapore Technologies Semiconductors Pte Ltd. and STATS. Includes 18,167,837 shares of Class A common stock which the filers may be deemed to beneficially own as a result of a voting agreement pursuant to which STATS was given an irrevocable proxy with respect to these shares to vote them in favor of the proposed merger between ChipPAC and STATS.

(4)

Mr. Conard is a limited partner of Bain Capital Partners VI, L.P., which is the general partner of Bain Capital Fund VI, L.P. In addition, Mr. Conard is a general partner of BCIP Associates II and BCIP Trust Associates II, L.P. In such capacities, Mr. Conard has a pecuniary interest in certain of the shares held by the Bain Capital Funds. Mr. Conard’s address is c/o Bain Capital, Inc., 745 Fifth Avenue, Suite 3200, New York, New York 10151.

(5)

Includes 9,153,995 shares owned by Citicorp Venture Capital, Ltd. Mr. Delaney is a Managing Director of Citigroup Venture Capital Equity Partners, an affiliated equity fund of Citicorp Venture Capital, Ltd. Accordingly, Mr. Delaney may be deemed to beneficially own all shares held by Citicorp Venture Capital, Ltd. Mr. Delaney disclaims beneficial ownership of all shares held by Citicorp Venture Capital, Ltd. Mr. Delaney’s address is c/o Citicorp Venture Capital, Ltd., 399 Park Avenue, New York, New York 10043.

(6)

Until March 2, 2004, Mr. Haines was a general partner of BCIP Associates II-B and BCIP Trust Associates II-B and in such capacity had a pecuniary interest in certain shares held by these funds. Mr. Haines’ address is c/o Texas Pacific Group, 345 California Street, Suite 3300, San Francisco, California 94104.

(7)

Includes 9,153,995 shares owned by Citicorp Venture Capital, Ltd. Mr. Schorr is a Managing Director of Citigroup Venture Capital Equity Partners, an affiliated equity fund of Citicorp Venture Capital, Ltd. Accordingly, Mr. Schorr may be deemed to beneficially own all shares held by Citicorp Venture Capital, Ltd. Mr. Schorr disclaims beneficial ownership of all shares held by Citicorp Venture Capital, Ltd. Mr. Schorr’s address is c/o Citicorp Venture Capital, Ltd., 399 Park Avenue, New York, New York 10043.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

As one of the lenders under our senior credit facilities, Sankaty High Yield Asset Partners, L.P., an affiliate of Bain Capital, Inc., received approximately $6.4 million total in principal and interest during 2003.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

PricewaterhouseCoopers LLP, who have been our independent public accountants since 1995, have again been selected by the audit committee to be our independent public accountants for 2004. Members of PricewaterhouseCoopers are expected be present at our annual meeting of stockholders in 2004 to make a statement if they so desire and to answer any appropriate questions.

The following table sets forth the aggregate fees billed or to be billed by PricewaterhouseCoopers for the following services during fiscal year 2003, and fees billed for 2002. Under the SEC’s new rule on auditor independence, which was adopted as a result of implementing the Sarbanes-Oxley Act of 2002, fees would be categorized as follows:


Categories	2003		2002
Audit fees⁽¹⁾	$	462,000	$	980,000
Audit related fees	$	100,000		—
Fees for tax services⁽²⁾		476,000		526,000
All other fees		—		—

Total	$	1,038,000	$	1,506,000

(1)

Audit fees in 2003 include $385,000 for services performed to comply with generally accepted auditing standards. In addition, audit fees include fees of $77,000 for services in connection with, for example, filing of registration statements relating to public offerings of stock and audits of statutory accounts.

Audit fees in 2002 include $513,000 for services performed to comply with generally accepted auditing standards. In addition, audit fees include fees of $467,000 for services in connection with, for example, filing of registration statements relating to public offerings of stock and audits of statutory accounts.

(2)	Includes $360,000 for 2003 and $423,000 for 2002 relating to tax planning, tax advice and tax assistance with tax audits and appeals.

Audit Committee Pre-Approval Process

Our audit committee reviews and pre-approves the scope and cost of all audit and permissible non-audit services performed by the independent auditors, other than those for de minimus services which are approved by the audit committee prior to the completion of the audit. The audit committee may form and delegate its pre-approval authority to subcommittees consisting of one or more members when appropriate, provided that the decisions of any subcommittee to grant pre-approvals shall be presented to the full audit committee at the next scheduled audit committee meeting. All of the services provided by PricewaterhouseCoopers during the last two fiscal years have been approved by the audit committee.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report

(1) Financial Statements. See the “Index to Financial Statements” in item 8.

(2) Financial Statement Schedules. See the schedule captioned “Valuation and Qualifying Accounts”.

REPORT OF INDEPENDENT AUDITORS ON

FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of ChipPAC, Inc.:

Our audits of the consolidated financial statements referred to in our report dated February 19, 2004 appearing in this Annual Report on Form 10-K of ChipPAC, Inc. also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERs LLP

San Jose, California

February 19, 2004

CHIPPAC, INC.

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS


Year ended December 31,	Balance at Beginning of Year		Additions Charged to Costs and Expenses		Deductions			Balance at End of Year
	(in thousands)
2003
Allowance for Doubtful Receivables	$	391	$	260	$	(77	)	$	574

2002
Allowance for Doubtful Receivables		449		36		(94	)		391

2001
Allowance for Doubtful Receivables		972		—		(523	)		449

(3) Exhibits.


2.1		Agreement and Plan of Merger and Reorganization, dated as of February 10, 2004, among ST Assembly Test Services Ltd, Camelot Merger, Inc. and ChipPAC, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s current report on Form 8-K filed February 20, 2004).

3.1		Amended and Restated Certificate of Incorporation of ChipPAC, Inc.**

3.2		Amended and Restated By-Laws of ChipPAC, Inc.**

4.1		Specimen certificate for ChipPAC, Inc. Common Stock.**

10.1		Credit Agreement, dated as of August 5, 1999, as amended and restated as of June 30, 2000, by and among ChipPAC International Company Limited, ChipPAC, Inc., the Lenders listed therein and Credit Suisse First Boston, as Administrative Agent, Sole Lead Manager and Collateral Agent.*

10.2		Guaranty, dated as of August 5, 1999, by and among ChipPAC, Inc. and certain subsidiaries of ChipPAC, Inc., in favor of Credit Suisse First Boston (incorporated by reference to Exhibit 4.5 of the Company’s registration statement on Form S-3 (Registration No. 333-69704)).

10.3		Amendment No. 1 to Amended and Restated Credit Agreement, dated as of March 13, 2001, by and among ChipPAC International Company Limited, ChipPAC, Inc., the Lenders listed therein and Credit Suisse First Boston, as Administrative Agent, Sole Lead Manager and Collateral Agent (incorporated by reference to Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2002 (No. 000-31173)).

10.4		Amendment No. 2 to Amended and Restated Credit Agreement, as amended, dated as of December 31, 2001 by and among ChipPAC International Company Limited, ChipPAC, Inc., the Lenders listed therein and Credit Suisse First Boston, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2001 (No. 000-31173)).

10.5		Amendment No. 3 to Amended and Restated Credit Agreement, as amended, dated as of December 31, 2001 by and among ChipPAC International Company Limited, ChipPAC, Inc., the Lenders listed therein and Credit Suisse First Boston, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K (No. 000-31173)).

10.6		Amendment No. 4 to Amended and Restated Credit Agreement, as amended, dated as of May 17, 2002 by and among ChipPAC International Company Limited, ChipPAC, Inc, the Lenders listed therein and Credit Suisse First Boston, as Administrative Agent and Collateral Agent. (incorporated by reference to the Company’s quarterly report on Form 10-Q for the period ended September 30, 2002).


10.7		Amendment No. 5 to Amended and Restated Credit Agreement, as amended, dated as of May 19,2003 by and among ChipPAC International Company Limited, ChipPAC, Inc., the Lenders listed therein and Credit Suisse First Boston, as Administrative Agent and Collateral Agent (incorporated by reference to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2003).

10.8		Subsidiary Guaranty Agreement, dated as of August 5, 1999, by and among ChipPAC Korea Company Ltd., ChipPAC Limited, ChipPAC (Barbados) Ltd., ChipPAC Luxembourg S.a.R.L., ChipPAC Liquidity Management Hungary Limited Liability Company and ChipPAC International Company Limited, in favor of Firstar Bank of Minnesota, N.A.*

10.8.1		Subsidiary Guaranty Agreement, dated as of October 12, 2001, by ChipPAC Malaysia Sdn. Bhd, in favor of U.S. Bank, N.A. (incorporated by reference to Exhibit 4.7 of the Company’s registration statement on Form S-3 (Registration No. 333-69704)).

10.9		Amended and Restated Registration Agreement, dated as of August 5, 1999, by and among ChipPAC, Inc. the Hyundai Group (as defined therein), the Bain Group (as defined therein), the SXI Group (as defined therein), Intel Corporation, ChipPAC Equity Investors LLC, and Sankaty High Yield Asset Partners, L.P.*

10.9.1		Amendment No. 1 to Amended and Restated Registration Agreement, dated as of June 30, 2000, by and among ChipPAC, Inc., Sapphire Worldwide Investments, Inc., the Bain Stockholders (as defined therein) and SXI Group LLC.**

10.9.2		Form of Amendment No. 2 to Amended and Restated Registration Agreement, dated as of July 13, 2000, by and among ChipPAC, Inc., Qualcomm Incorporated, SXI Group LLC and the Bain Shareholders (as defined therein).**

10.9.3		Form of Amendment No. 3 to Amended and Restated Registration Agreement, dated as of August 2, 2000, by and among ChipPAC, Inc., Bain Capital, Inc., SXI Group LLC and the Bain Shareholders (as defined therein).**

10.10		Transition Services Agreement, dated as of August 5, 1999, by and among Hyundai Electronics Industries Co., Ltd., Hyundai Electronics America, ChipPAC, Inc., ChipPAC Korea Company Ltd., Hyundai Electronics Company (Shanghai) Ltd., ChipPAC Assembly and Test (Shanghai) Company Ltd., ChipPAC Barbados Limited and ChipPAC Limited.*

10.11		Lease Agreement, dated as of June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.*

10.11.1		Amendment Agreement, dated September 30, 1998, to Lease Agreement, dated June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.*

10.11.2		Amendment Agreement 2, dated September 30, 1999, to Lease Agreement, dated June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.*

10.12		Agreement Concerning Supply of Utilities, Use of Welfare Facilities and Management Services for Real Estate, dated as of June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.*

10.13		Service Agreement, dated as of August 5, 1999, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Limited.*+

10.14		Sublease Agreement, dated as of May 1, 1998, by and between Hyundai Electronics America and ChipPAC, Inc.*

10.15		Employment letter agreement, dated as of January 10, 2003 between ChipPAC, Inc. and Robert Krakauer (incorporated by reference to the Company’s Annual Report on Form 10-K for the period December 31, 2002).++


10.16		Employment letter agreement, dated as of January 13, 2003 between ChipPAC, Inc. and Patricia McCall (incorporated by reference to the Company’s Annual Report on Form 10-K for the period December 31, 2002).++

10.17		Employment Agreement, dated as of October 1, 1999, between ChipPAC, Inc. and Dennis McKenna.*++

10.18		ChipPAC, Inc. 1999 Stock Purchase and Option Plan.*++

10.19		ChipPAC, Inc. 2000 Equity Incentive Plan.**++

10.20		ChipPAC, Inc. 2000 Employee Stock Purchase Plan.**++

10.21		Form of Key Employee Purchased Stock Agreement.*++

10.21.1		Form of Key Employee Purchased Stock Agreement (with Loan).*++

10.22		Form of Employee Restricted Stock Agreement.*++

10.23		Form of Directors Tranche I Stock Option Agreement.*++

10.24		Form of Employees Tranche I Stock Option Agreement.*++

10.25		Form of Tranche II Stock Option Agreement.*++

10.26		Indenture, dated as of July 29, 1999, by and among ChipPAC International Limited, ChipPAC Merger Corp. and Firstar Bank of Minnesota, N.A., as trustee.*

10.27		First Supplemental Indenture, dated as of August 5, 1999, by and among ChipPAC International Company Limited, ChipPAC, Inc. and Firstar Bank of Minnesota, N.A., as trustee.*

10.28		12.75% Senior Subordinated Notes Due 2009.*

10.29		Form of Series B 12.75% Senior Subordinated Notes Due 2009.*

10.30		Intellectual Property Rights Agreement, entered into as of June 30, 2000, by and between Intersil Corporation and ChipPAC Limited.**

10.31		Supply Agreement, entered into as of June 30, 2000, by and between Intersil Corporation and ChipPAC Limited.**

10.32		Employment letter agreement, dated as of November 15, 1999 between ChipPAC, Inc. and Robert Krakauer (incorporated by reference to the Company’s annual report on Form 10-K for the period December 31, 2000).++

10.33		Separation Agreement, dated February 9, 2004, between ChipPAC, Inc., ST Assembly Test, Ltd and Dennis McKenna.++

10.34		Employment letter agreement, dated as of October 9, 2000 between ChipPAC, Inc. and Patricia McCall (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2001).++

10.35		Indenture, dated as of June 15, 2001, by and between ChipPAC, Inc. and Firstar Bank, N.A. as trustee (incorporated by reference to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2001).

10.36		Registration Rights Agreement, dated June 22, 2001, by and between ChipPAC International Company Limited and Citicorp Capital Investors Limited (incorporated by reference to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2001).

10.37		Registration Rights Agreement, dated June 22, 2001, by and between ChipPAC, Inc. and Citicorp Mezzanine III, L.P. (incorporated by reference to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2001).

10.38		Patent and Technology License Agreement, dated as of August 5, 1999, by and between Hyundai Electronics Industries, Co., Ltd. and ChipPAC Limited (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2001). +


10.39		Registration Rights Agreement, dated March 28, 2003, by and between ChipPAC Inc. and Lehman Brothers Inc. (incorporated by reference to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2003).

10.40		Indenture, dated as of May 28, 2003, by and between ChipPAC, Inc. and U.S. Bank National Association, as trustee. (incorporated by reference to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2003).

10.41		ChipPAC, Inc. Employee Retention and Severance Plan.++

21.1		Subsidiaries of ChipPAC, Inc., ChipPAC International Company Limited, ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Liquidity Management Limited Liability Company, ChipPAC Luxembourg S.a.R.L. and ChipPAC Korea Company Ltd. (incorporated by reference to the Company’s quarterly report on Form 10-Q for the period ended on June 30, 2002).

23.1		Consent of PricewaterhouseCoopers LLP.

31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.

31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.

32.1		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.

32.2		Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.

99.1		Risk Factors

*	Incorporated by reference to the Company’s Form S-4 (No. 333-91641).

**	Incorporated by reference to the Company’s Form S-1 (No. 333-39428).

+	Confidential treatment has been granted as to certain portions of these exhibits, which are incorporated by reference.

++	Identifies each management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K.

On October 29, 2003 the Company filed a report on Form 8-K, on items 7 and 12, announcing the Company’s results for its quarter ended September 30, 2003.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, as of March 12, 2004.

CHIPPAC, INC.

(Registrant)

/s/ ROBERT KRAKAUER

Robert Krakauer

Executive Vice President and Chief Financial Officer

/s/ MICHAEL G. POTTER

Michael G. Potter

Vice President, Controller and Principal Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennis P. McKenna, Robert Krakauer and Michael G. Potter, and each of them, his/her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him/her and in her/her name, place and stead, in any and all capacities, to sign any or all amendments to this annual report on Form 10-K under the Securities Exchange Act of 1934, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his/her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.


Signature	Title	Date
/s/ DENNIS P. MCKENNA Dennis P. McKenna	President, Chief Executive Officer and Director (Principal Executive Officer)	March 12, 2004

/s/ ROBERT J. KRAKAUER Robert J. Krakauer	Executive Vice President and Chief Financial Officer (Principal Financial Officer)	March 12, 2004

/s/ MICHAEL G. POTTER Michael G. Potter	Vice President and Controller (Principal Accounting Officer)	March 12, 2004

/s/ EDWARD CONARD Edward Conard	Director	March 12, 2004

/s/ ROBERT CONN Robert Conn	Director	March 12, 2004


Signature	Title	Date

/s/ MICHAEL A. DELANEY Michael A. Delaney	Director	March 12, 2004

/s/ MARSHALL HAINES Marshall Haines	Director	March 12, 2004

/s/ DOUGLAS NORBY Douglas Norby	Director	March 12, 2004

/s/ CHONG SUP PARK Chong Sup Park	Director	March 12, 2004

/s/ PAUL C. SCHORR, IV Paul C. Schorr, IV	Director	March 12, 2004

EX-10.33 3 dex1033.htm SEPARATION AGREEMENT, DATED FEBRUARY 9, 2004 Separation Agreement, dated February 9, 2004

Exhibit 10.33

SEPARATION AGREEMENT

THIS SEPARATION AGREEMENT (the “Agreement”) is made and entered into and is effective as of this 10th day of February 2004, by and among ST Assembly Test Services Ltd, a Singapore public company limited by shares (the “Company”), CHIPPAC, Inc., a Delaware company (“CHIPPAC”) and Dennis McKenna (the “Executive”).

WHEREAS, the Executive is currently employed by CHIPPAC, and is a party to an employment agreement, dated October 1, 1999, as the same may have been amended from time to time, with CHIPPAC (the “Existing Employment Agreement”); and

WHEREAS, in connection with the transaction contemplated by the Agreement and Plan of Merger and Reorganization among the Company, Camelot Merger, Inc. and CHIPPAC that is contemplated to be entered into contemporaneously with the execution of this Agreement (the “Merger Agreement”), ChipPAC will become a wholly owned subsidiary of the Company; and

WHEREAS, the Executive now desires to resign from his position as President and Chief Executive Officer (“CEO”) of CHIPPAC, effective as of the Effective Date (as hereinafter defined);

WHEREAS, incidental to the Executive’s resignation described in the foregoing recital, the Executive now desires to relinquish his position as a member of the Board of Directors of CHIPPAC, effective as of the Effective Date; and

WHEREAS, the Company believes that it is in the best interests of its shareholders to appoint the Executive to serve as a member of and Vice Chairman of the Board of Directors of the Company (the “Board”), and the Executive has agreed to serve in such capacity; and

WHEREAS, the parties intend that this Agreement shall set forth the terms of their agreement with respect to the foregoing and that this Agreement shall supersede all prior agreements between CHIPPAC and the Executive, including the Existing Employment Agreement, as of the Effective Date (as hereinafter defined), and the Chief Executive Officer Management Incentive Agreement, dated as of August 1, 1998, as the same may have been amended or modified from time to time, by and between CHIPPAC and the Executive (other than that certain Mutual Release of Claims attached as Exhibit A thereto).

NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants, terms and conditions set forth herein, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1. Effectiveness of Agreement. This Agreement shall constitute a binding obligation of the Executive and the Company upon the execution of this Agreement; provided,

however, that any other provision in this Agreement to the contrary notwithstanding, the terms hereof shall not become effective until the consummation of the transactions contemplated by the Merger Agreement (the “Effective Date”). In the event that the Merger Agreement is terminated prior to the Closing (as defined in the Merger Agreement) or the transactions contemplated in the Merger Agreement are not consummated, this Agreement shall be null and void ab initio and shall terminate without further notice.

2. Resignation from Office. Effective as of the Effective Date, the Executive shall resign from his position as President and Chief Executive Officer of CHIPPAC. Incidental to such resignation, the Executive will relinquish his position as a member of the Board of Directors of CHIPPAC, and from each and every other position as an employee, officer or director of CHIPPAC, its subsidiaries and associated companies on the Effective Date.

3. Vice Chairman of the Board. The Company shall nominate the Executive to serve, effective as of the Effective Date, as a member and Vice Chairman of the Board for a term to continue through December 31, 2004, or such earlier date as mutually agreed upon by the Company and the Executive (the “Term”). The Executive hereby agrees to resign on December 31, 2004 as a member of the Board and from his position as Vice Chairman of the Board, and on such date, he shall deliver a letter of resignation in the form attached hereto as Exhibit A.

4. Consideration. In consideration of the Executive’s covenants contained in this Agreement (in particular, his resignation as President and CEO of ChipPAC) and his execution and delivery of a Release Agreement in the form set forth as Exhibit B hereto (the “Release”) on the Effective Date, CHIPPAC shall provide the Executive with the following payments and benefits:

(a) Payment. On the day next following the expiration of the Revocation Period (as defined in the Release), CHIPPAC shall pay the Executive an amount equal to three times the Executive’s annual base salary at the rate in effect immediately preceding the Effective Date, plus three times the Executive’s annual target bonus at the rate in effect immediately preceding the Effective Date.

(b) Option Vesting Acceleration. Effective as of the day next following the expiration of the Revocation Period, all equity-based compensation awards with respect to the equity securities of CHIPPAC held by the Executive shall vest in full and become immediately exercisable and shall remain exercisable until the first anniversary of date that the awards become fully vested in accordance with this Section 4(b).

(c) Term Life Insurance. Effective as soon as practicable following the expiration of the Revocation Period, CHIPPAC shall fund in full the term life insurance policy provided to the Executive pursuant to the terms of the Existing Employment Agreement.

(d) Medical and Dental Benefits. CHIPPAC shall pay for the cost of insurance premiums with respect to medical and dental benefits for the Executive and his dependents during the period commencing as of the day next following the expiration of the Revocation Period and continuing until the date that is the earlier of the third anniversary of the day next following the expiration of the Revocation Period and the date that the Executive becomes entitled to participate in employee benefit plans of a subsequent employer that provide for medical and dental benefits that are comparable to the medical and dental benefits to which the Employee was entitled to receive immediately preceding the Effective Date.

(e) Cap. Anything to the contrary in this Agreement notwithstanding, the aggregate amount payable under Section 4(c) and (d) shall in no event exceed $150.000.00.

5. Reduction of Payments. In the event that the severance and other benefits provided to the Executive under this Agreement or any other agreement or arrangement constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and, but for this Section 5, such severance and benefits would be subject to the excise tax imposed by Section 4999 of the Code, then the aggregate severance and benefits payable to the Executive under this Agreement shall be reduced such that the present value thereof (as determined under the Code and the applicable regulations) is equal to 2.99 times the Executive’s “base amount,” as defined in Section 280G(b)(3) of the Code. For purposes of applying the provisions of this Section 5, the Company shall be entitled to rely on the advice of legal counsel or a nationally recognized accounting firm as to whether any payments or benefits payable to the Executive constitute “Parachute Payments” under 280G of the Code.

6. No Other Payments or Benefits. Except as otherwise expressly provided in this Agreement, the Executive acknowledges and agrees that he is not entitled to any payment, compensation or benefits (whether statutorily or otherwise) from the Company in connection with this Agreement and that, except as expressly set forth herein, he is not entitled to any severance or similar benefits under any agreement, plan, program, policy or arrangement, whether formal or informal, written or unwritten, of the Company.

7. Non-Disparagement. Following the Effective Date, the Executive shall not, nor shall he cause another person to, directly or indirectly, make any statement that disparages or is derogatory of the Company or its subsidiaries and affiliates in any communications with any person.

8. Covenants of Executive.

(a) Confidential Information. As used in this Agreement, the term “Affiliated Companies” means the Company’s clients, subcontractors and other companies or individuals with which the Company carries on business or joint enterprises. As used in this Agreement, the term “Confidential Information” means any and all information disclosed, acquired or known to the Executive as a result of employment with the Company or any of the Affiliated Companies, including, without limitation, any information gathered or developed by the Executive and relating to the business of the Company or any of the Affiliated Companies. Confidential Information includes, without limitation, all documents pertaining to the business of the Company or any of the Affiliated Companies, including trade secrets, technical and financial information, data, designs, systems drawings, proposals, client lists, client records, economic and financial analysis, financial data, customer contracts, notes, memoranda, books, correspondence, manuals, reports or research, whether developed by the Company or any of the Affiliated Companies or developed by the Executive acting alone or jointly with the Company or any of the

Affiliated Companies, any product development and ideas, apparatus as well as all other information, written, oral, graphic or computerized relating to the business of the Company or any of the Affiliated Companies, provided, that Confidential Information shall exclude (i) any information which is publicly available, so long as such information was not publicly disclosed by the Executive or any other person or entity in contravention of a non-disclosure agreement with the Company; (ii) any information generally available or known in the industry; and (iii) any information known to the Executive before employment with the Company. The Executive represents and warrants that the Executive shall at all times, including following the Effective Date, keep secret and retain in strictest confidence all Confidential Information, and except as the Executive may be authorized by the Company or Affiliated Companies in writing, the Executive agrees not to publish or disclose to any person or entity, or use in any manner, such Confidential Information. The Executive’s obligations under this Section 8(a) supplement, and do not limit or replace, any other obligations that the Executive may have including, but not limited to, obligations under statute, common law or contract.

(b) Noncompetition. The Executive agrees with the Company that for a period of twenty-four (24) calendar months following the Effective Date (the “Restricted Period”), the Executive shall not, directly or indirectly, engage in any business, whether as a proprietor, partner, joint venturer, employer, agent, employee, consultant, officer or beneficial or record owner of more than one percent (1%) of the stock of any corporation or association of any nature which is competitive to the business conducted by the Company or any of the Company’s subsidiaries, affiliates, successors or assigns (collectively referred to herein as the “Companies”) in the geographical service area in which the Companies have engaged or will engage during such period (including, without limitation, any area in which any client or customer of the Companies may be located).

(c) Non-Solicitation. During the Restricted Period, the Executive shall not directly or indirectly through another person or entity (i) induce or attempt to induce any employee of the Companies to leave the employ of the Companies, or in any way interfere with the relationship between any of the Companies and any employee thereof, (ii) hire any person who was an employee of any of the Companies at any time during the period that the Executive was employed by the Company or (iii) induce or attempt to induce any customer, supplier, licensee, licensor, franchisee or other business relation of the Companies that is within any geographical area in which the Companies engage or plan to engage in such businesses to cease doing business with the Companies or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Companies.

(d) Non-Disparagement. The Executive agrees that at any time during his employment with the Company or at any time thereafter, the Executive shall not make, or cause or assist any other person to make, any statement or other communication which impugns or attacks, or is otherwise critical of, the reputation, business or character of the Company, any subsidiary or any of their respective officers, directors, employees, products or services.

(e) Enforcement. The Executive hereby acknowledges that he has carefully reviewed the provisions of this Agreement and agrees that the provisions are fair and equitable. However, in light of the possibility of differing interpretations of law and change in circumstances, the parties hereto agree that if any one or more of the provisions of this

Agreement is determined by a court of competent jurisdiction to be invalid, void or unenforceable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable or enforceable under such circumstances shall be substituted for the stated period, scope or area. Because the Executive’s services are unique and because the Executive has had access to Confidential Information, the parties hereto agree that money damages will not be an adequate remedy for any breach of this Agreement. Therefore, in the event a breach or threatened breach of this Agreement, the Company or its successors or assigns may, in addition to other rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance, injunctive, other relief of the foregoing in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security).

9. Severability. Each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. If any of the provisions contained in this Agreement shall be determined by a court of competent jurisdiction or an arbitration to be excessively broad as to duration, activity, geographic application or subject matter, such provision shall be construed, by limiting or reducing it to the extent legally permitted, so as to make such provision enforceable to the extent compatible with then-applicable law.

10. Notices. For the purpose of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be sent by messenger, overnight courier, certified or registered mail, postage prepaid and return receipt requested or by facsimile transmission to the parties at their respective addresses and fax numbers set forth below or to such other address or fax number as to which notice is given.


If to the Company:		ST Assembly Test Services Ltd

		10 Ang Mo Kio Street 65
		#05-17/20 Techpoint, Singapore 569059
		Attention: Linda Nai
		Facsimile No: (+65) 6720-7829
		Email Address: nailinda@stats.st.com.sa

If to the Executive:		Dennis McKenna
		4535 Kingwood Drive
		Danville, California 94506
		Facsimile: [ ]

Notices, demands and other communications shall be deemed given on delivery thereof.

11. Entire Agreement. This Agreement and the Release represent the entire agreement of the parties concerning the subject matter of this Agreement and shall supersede any and all previous contracts, arrangements or understandings with respect to such subject matter between the Company CHIPPAC and the Executive including, without limitation, the agreements described in the recitals to this Agreement.

12. Amendment. This Agreement may be amended at any time by mutual written agreement of the parties hereto.

13. Withholding. Any payments made to the Executive under this Agreement shall be reduced by the full amount legally required to be withheld for income or other payroll tax purposes by the CHIPPAC.

14. Governing Law. The provisions of this Agreement shall be construed in accordance with, and governed by, the laws of the State of California, without regard to principles of conflict of laws.

15. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

16. Acknowledgement. The Executive acknowledges that (a) he has carefully read this Agreement and discussed the requirements and limitations of this Agreement, (b) to the extent the Executive believed necessary, he has consulted with his own counsel, and (c) he has not relied upon Kirkland & Ellis LLP, counsel for CHIPPAC, in connection with his decision to execute this Agreement or otherwise in connection with any other agreement or document that he has entered into in connection with the Merger Agreement or the transactions contemplated thereby.

[SIGNATURE PAGE ON FOLLOWING PAGE]

IN WITNESS WHEREOF, the Company and the Executive, intending to be legally bound have executed this Agreement on the day and year first above written.


ST Assembly Test Services Ltd

By:		/s/ TAN LAY KOON

		Name: Tan Lay Koon Title: President and Chief Executive Officer


CHIPPAC, Inc.

By:		/s/ DENNIS DANIELS

		Name: Dennis Daniels Title: VP Human Resources

DENNIS MCKENNA

/s/ DENNIS MCKENNA

EXHIBIT A

December 31, 2004

The Board of Directors

Spartacus

5 Yishun Street

Singapore 768442

Dear Sirs:

Notice of Resignation

I, Dennis McKenna, hereby give notice of my resignation as a Director and Vice-Chairman of Spartacus, such resignation to take effect on 31 December 2004.

Yours faithfully,

Dennis P. McKenna

A-1

EXHIBIT B

RELEASE AGREEMENT

THIS RELEASE AGREEMENT (the “Release”) is made and entered into and is effective as of February 10, 2004, by and among ST Assembly Test Services Ltd, a Singapore public company limited by shares (the “Company”), CHIPPAC, a Delaware company (“CHIPPAC”), and Dennis McKenna (the “Executive”). In consideration of the mutual agreements set forth below, the Executive, the Company and CHIPPAC hereby agree as follows:

1. RELEASE OF CLAIMS AGAINST THE COMPANY: For good and valuable consideration, including the payments and benefits set forth in the Separation Agreement by and among the Company, CHIPPAC and the Executive, dated February 10, 2004 (the “Agreement”), of which this Release forms a part, which includes special enhancements to which the Executive would not otherwise be entitled under current company policies, plans, and guidelines, the Executive hereby knowingly, voluntarily, and willingly releases, discharges, and covenants not to sue the Company and its direct and indirect parents, subsidiaries, affiliates, and related companies, past and present, as well as each of its and their directors, officers, employees, and agents thereof, representatives, attorneys, trustees, insurers, assigns, successors, and agents, past and present (collectively hereinafter referred to as the “Released Parties”), from and with respect to any and all actions, claims, or lawsuits, whether known or unknown, suspected or unsuspected, in law or in equity, which the Executive, and his heirs, executors, administrators, successors, assigns, dependents, descendants, and attorneys ever had, now have, or hereafter can, shall or may have against the Released Parties, arising out of or in any way relating to the Executive’s employment by the Company and its subsidiaries and affiliates, his separation from that employment, including, without limitation, the following:

(a)

any and all claims relating to or arising from Executive’s employment relationship with the Company and the termination of that relationship;

(b)

any and all claims relating to or arising from Executive’s right to purchase, or actual purchase, of shares of stock of the Company;

(c)

any and all claims for wrongful discharge of employment; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; and defamation;

(d)

any and all claims arising under the Employee Retirement Income Security Act of 1974, the Civil Rights Acts of 1866 and 1867, Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights and Women’s Equity Act of 1991, Sections 1981 through 1988 of Title 42 of the United

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States Code, as amended, the Occupational Safety and Health Act of 1970, the Consolidated Omnibus Budget Reconciliation Act of 1985, the Family and Medical Leave Act of 1993, the Worker Adjustment and Retraining Notification Act of 1988, the Vocational Rehabilitation Act of 1973, the Equal Pay Act of 1963, the Americans with Disabilities Act, the Fair Labor Standards Act and the National Labor Relations Act, as amended, the California Fair Employment and Housing Act, the California Unruh Civil Rights Act, the California Equal Pay Law, any other federal or state anti-discrimination law or any local or municipal ordinance relating to discrimination in employment or human rights and under the common law;

(e)

any and all claims for salary, bonus, severance pay, pension, vacation pay, life insurance, health or medical insurance, or any other fringe benefits, other than the payments and benefits provided for in or in accordance with the Agreement;

(f)

any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; and

(g)

any and all claims for attorneys’ fees and costs.

The Executive acknowledges that he may hereafter discover claims or facts in addition to or different from those which he now knows or believes to exist with respect to the subject matter of this Release and which, if known or suspected at the time of executing this Release, may have materially affected this Release or his decision to enter into it. Nevertheless, the Executive hereby waives any right, claim, or cause of action that might arise as a result of such different or additional claims or facts and Executive hereby expressly waives any and all rights and benefits conferred upon Executive by the provisions of Section 1542 of the Civil Code of the State of California, which provides as follows:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.”

Each of the parties, being aware of the foregoing California statute, agrees to expressly waive any rights the party may have thereunder, as well as under any other statute or common law principles of similar effect.

2. ADEA RELEASE: In recognition of the consideration provided in the Agreement, the Executive hereby releases and discharges the Released Parties from any and all claims, actions and causes of action that he may have against the Released Parties arising under the U.S. Age Discrimination in Employment Act of 1967, as amended, and the applicable rules and regulations promulgated thereunder (“ADEA”).

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The Executive acknowledges that he understands that ADEA is a federal statute that prohibits discrimination on the basis of age in employment, benefits and benefit plans.

By signing this Release, the Executive hereby acknowledges and confirms the following:

(a)

He is providing the release and discharge set forth in this Section 2 in exchange for consideration in addition to anything of value to which he is already entitled.

(b)

He was hereby advised by the Company in writing to consult with an attorney of his choice prior to signing this Release and to have such attorney explain to his the terms of this Release including, without limitation, the terms relating to his release of claims arising under ADEA.

(c)

He has read this Release carefully and completely and understands each of the terms thereof.

(d)

He is aware that he has twenty-one days in which to consider the terms of this Release, which the Executive has knowingly and voluntarily waived by accepting the terms of the offer as described herein. For a period of seven days following his acceptance hereof, the Executive has the right to revoke the release contained in this Section 2 (the “Revocation Period”) commencing immediately following the date he signs and delivers this Release to the Company. The Revocation Period shall expire at 5:00 p.m. E.S.T. on the last day of the Revocation Period; provided, however, that if such seventh day is not a business day, the Revocation Period shall extend to 5:00 p.m. on the next succeeding business day. No such revocation by shall be effective unless it is in writing and signed by the Executive and received by the Company prior to the expiration of the Revocation Period.

As set forth in section 7(f)(1)(C) of the ADEA, as added by the Older Workers Benefit Protection Act of 1990, Executive understands that Executive is not waiving any rights or claims provided under ADEA that may arise after this Agreement is executed by Executive.

3. CONTINUING OBLIGATIONS: This Release shall not supersede any continuing obligations the Executive has under the terms of the Agreement. Both of the parties agree that nothing in this Release shall in any way be construed to affect either party’s rights under any applicable indemnification agreement or insurance policy and nothing contained herein shall be interpreted in an applicable manner so as to violate any provision of such agreement or policy.

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4. CHOICE OF LAW: This Release and the rights and obligations of the parties hereunder shall be governed by and construed and enforced in accordance with the laws of the State of California, without regard to principles of conflict of laws.

[SIGNATURE PAGE ON FOLLOWING PAGE]

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IN WITNESS WHEREOF, the Company and the Executive, intending to be legally bound, have executed this Release on the day and year first above written.


ST Assembly Test Services Ltd.

By:		/s/ Tan Lay Koon

		Name: Tan Lay Koon Title: President and Chief Executive Officer


CHIPPAC, Inc.

By:		/s/ Dennis Daniels

		Name: Dennis Daniels Title: VP Human Resources

DENNIS MCKENNA

/s/ Dennis McKenna

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EX-10.41 4 dex1041.htm CHIPPAC, INC EMPLOYEE RETENTION AND SEVERANCE PLAN ChipPAC, Inc Employee Retention and Severance Plan

Exhibit 10.41

CHIPPAC, INC.

EMPLOYEE RETENTION AND SEVERANCE PLAN

ChipPAC, Inc., a Delaware corporation (“ChipPAC”), and its subsidiaries (together with ChipPAC, the “Company”), hereby establish the “ChipPAC, Inc. Employee Retention and Severance Plan” (together with Annex A hereto and the Agreements, the “Plan”) in connection with the transactions contemplated by the Agreement and Plan of Merger and Reorganization among ST Assembly Test Services Ltd. (“STATS”), Camelot Merger, Inc. and ChipPAC, Inc., dated as of February 10, 2004 (the “Merger Agreement”).

ARTICLE I

DEFINITIONS

Unless elsewhere defined in the Plan, the following terms when capitalized in the Plan shall have the designated meaning unless a different meaning is plainly required by the context in which the term is used:

“Administrator” means Dennis W. Daniels or any successor Administrator appointed by the Compensation Committee of the Board.

“Agreement” means the award agreement specifying the benefits for which a Participant is eligible that each Participant must execute within the time period established by Administrator as a condition precedent to his or her right to receive such benefits.

“Board” means the board of directors of ChipPAC, Inc.

“Cause” means: (a) failure by Participant to substantially perform Participant’s customary duties as an employee of the Company in the ordinary course (other than such failure resulting from Participant’s incapacity due to physical or mental illness or any such actual or anticipated failure after Participant provides written notification to Administrator of termination of employment for Good Reason under the Plan) that, if susceptible to cure, has not been cured, as determined by Administrator in its sole discretion, within 10 days after a written demand for substantial performance is delivered to Participant by the Company, which demand specifically identifies the manner in which the Company believes that Participant has not substantially performed Participant’s duties; (b) Participant’s gross negligence, intentional misconduct or fraud in the performance of his or her employment; (c) Participant’s indictment for a felony or for a crime involving fraud or dishonesty; or (d) Participant’s material violation of one or more of the Company’s policies applicable to Participant’s employment as may be in effect from time to time.

“ChipPAC Stock Option” means an option to purchase shares of ChipPAC Class A Common Stock outstanding immediately prior to the Closing, whether or not exercisable and whether or not vested, under the ChipPAC, Inc. 1999 Stock Purchase and Option Plan and the ChipPAC, Inc. 2000 Equity Incentive Plan.

“Claims Administrator” means Administrator or its delegee responsible for administering claims for benefits under the Plan.

“Claims Appeal Administrator” means Administrator or its delegee responsible for administering appeals from the denial or partial denial of claims for benefits under the Plan.

“Closing” means the closing of the transactions contemplated by the Merger Agreement.

“Closing Base Pay” means, for any Participant, the Weekly Base Pay of such Participant determined on the business day immediately preceding the Closing.

“COBRA” means Part 6 of Subtitle B of Title I of ERISA, Section 4980B of the Code and applicable regulations thereunder.

“Code” means the U.S. Internal Revenue Code of 1986, as amended.

“Effective Date” means February 10, 2004; provided, however, that in the event that the Merger Agreement is terminated, this Plan shall be void ab initio and no payments of any kind shall be made hereunder.

“Eligible Employee” means those employees of the Company described in Section 2.01.

“ERISA” means the U.S. Employee Retirement Income Security Act of 1974, as amended.

“Favorable Resolution” means final resolution in favor of Participant, by Administrator or otherwise, of a claim for Plan benefits filed by Participant in accordance with Article V.

“Good Reason” for termination of employment with the Company will be deemed to exist, unless Participant otherwise consents in writing, under one or more of the following circumstances if and only if on or prior to such Participant’s termination of employment, he or she informs the Company in writing that one of such circumstances has occurred and that, if susceptible to cure, has not been cured, as determined by Administrator in its sole discretion, within 10 days after a written demand for substantial performance is delivered to the Company by the Participant, which demand specifically identifies the manner in which the Participant believes that the Company has not performed its obligations:

(a) a reduction in Participant’s Weekly Base Pay to an amount less than Participant’s Closing Base Pay; provided, however, that any reduction that occurs concurrently with a reduction in salary of up to 10% over a two-year period commencing as of the Closing affecting the Chief Executive Officer of the Company, senior management of the Company and a majority of the employees of the Company worldwide as a result of a sustained, economic downturn and for the purpose of avoiding a material reduction in force, such reduction shall not constitute Good Reason under this subsection; it being understood that for clarity “the Company”

shall include STATS and its subsidiaries and other affiliates immediately following the Effective Date;

(b) as a condition of continued employment, Participant is required to work at a location more than 50 miles from the location of Participant’s work on the business day immediately preceding the Closing, in which case Good Reason shall not be deemed to exist until the date Participant is required to report to the new location; provided, however, that required travel on business of the Company to an extent substantially consistent with Participant’s business obligations on the business day immediately preceding the Closing shall not constitute Good Reason under this subsection; provided, further, that travel by sales personnel, technical program managers, product line marketing managers, product line engineers and finance personnel to the facilities of the Company and its subsidiaries shall not constitute Good Reason under this subsection;

(c) the nature or status of Participant’s authorities, duties or responsibilities has been materially and adversely altered from that in effect on the business day immediately preceding the Closing; provided, however, that alterations reasonably connected with the Company’s efforts to effect the Closing and the Integration shall not constitute Good Reason; or

(d) a material reduction in Participant’s level of benefits provided under any of the Company’s short- and/or long-term incentive compensation plans, or employee benefit plans, policies, practices or arrangements in which Participant participates on the business day immediately preceding the Closing; provided, however, that reductions in equity-based compensation plans shall not constitute Good Reason; provided, further, that reductions in the level of benefits provided under any such plans, policies, practices or arrangements shall not constitute Good Reason if Participant’s reduced level of benefits remains substantially consistent with the average level of benefits under such plans, policies, practices or arrangements provided to other employees who have positions commensurate with Participant’s position;

“Integration” means the process by which the Company and STATS combine their businesses as contemplated by the Merger Agreement.

“Offer Letter” means the letter or agreement memorializing the terms of employment offered to and accepted by Participant at the commencement of his or her employment with the Company, as such letter or agreement may have been subsequently amended prior to the Effective Date.

“Participant” means an Eligible Employee selected by Administrator to participate in the Plan and who fulfills the requirements for participation in the Plan, including those set forth in Section 2.03.

“Release” means the general waiver and release, substantially in the form attached to the Plan as Annex A, to be executed and not revoked within the periods established by Administrator as a condition precedent to his or her right to receive certain benefits as may be specified in his or her Agreement.

“Weekly Base Pay” means, for any Participant, as of any date of determination, his or her annual base salary as of such date of determination, divided by 52 weeks, whether such

salary is paid under monthly, semi-monthly, weekly, daily, hourly or other base rates then in effect. Weekly Base Pay shall include any amounts contributed by Participant to any retirement plan of the Company that, pursuant to Section 401(k) of the Code, are not included in the gross income of Participant in the taxable year for which such contributions are made, and shall include any amounts contributed by Participant to any welfare benefit plans maintained by the Company through a reduction in Participant’s compensation that, pursuant to Section 125 of the Code, are not included in the gross income of Participant for the taxable year in which such amounts are contributed, but shall exclude overtime earnings, bonuses, payments made to Participant under the ChipPAC, Inc. Sales Incentive Plan or ChipPAC, Inc. Short-Term Incentive Plan or any successor plans thereto, other incentive payments, or any special and extra compensation paid to Participant.

ARTICLE II

PARTICIPATION

Section 2.01. Eligibility. Only active, full-time employees of the Company as of the Closing are eligible to become Participants.

Section 2.02. Participant Selection. Administrator, after consultation with members of senior management of ChipPAC, shall determine, in its sole discretion, each Eligible Employee who will participate in the Plan and the benefits for which such Participant will be eligible. Administrator’s selection of Participants and designation of potential benefits shall be final, binding and conclusive as of the date such assignments are made.

Section 2.03. Participation. Administrator shall select Eligible Employees in accordance with Section 2.02 to participate in the Plan and advise them of the conditions governing participation and entitlement to benefits under the Plan (including, without limitation, the occurrence of the Closing) by delivering to them the Agreement, the terms of which are hereby incorporated by reference. To be eligible for benefits under the Plan, an Eligible Employee must file with Administrator, within the time period established by Administrator, an executed Agreement. A Participant’s entitlement to benefits shall be determined in accordance with Article III and pursuant to the terms of his or her Agreement.

ARTICLE III

RETENTION BENEFITS AND TERMS OF PAYMENT

Section 3.01. Plan Benefits. Administrator shall determine the benefits for which a Participant may be eligible under the Plan and shall designate such benefits in Participant’s Agreement.

Section. 3.02. Conditions Precedent to Plan Benefits. A Participant’s entitlement to receive benefits under the Plan shall be determined in accordance with the terms and conditions of the Plan and his or her Agreement and, subject to Section 5.02(i), shall be conditioned on the following:

(a) Participant’s selection by Administrator;

(b) Participant’s execution and return to Administrator of an Agreement within the time period established by Administrator;

(d) the occurrence of the Closing;

(e) Participant’s continued full-time employment with the Company from the Effective Date through and including the Closing;

(f) for any claims for benefits in the event of termination by the Company without Cause or by Participant for Good Reason, if so provided in Participant’s Agreement, Participant’s timely submission of a claim for Plan benefits in accordance with Section 5.04 and the Favorable Resolution of such claim; and

(g) to the extent required pursuant to the terms of a Participant’s Agreement, Participant’s timely execution of, return of, and failure to revoke the Release.

Section 3.03. Payments. The payments to be made pursuant to the Plan shall be provided to Participant in the same manner (i.e., direct deposit or by internal mail delivery) as Participant receives his or her regular paycheck or by mail at the last known address of Participant in the possession of the Company, at the discretion of Administrator. Federal and state income taxes shall be withheld from any payments under the Agreement and the Plan at the applicable rates, in addition to all other withholdings required by law.

Section 3.04. Requirement of Waiver and Release. A Participant’s Agreement will state if a Participant is required to execute and effectuate a Release satisfactory to the Company, in form and substance that is substantially similar to that attached as Annex A, prior to receipt of benefits under the Plan. In the event the Release is determined to be invalid or unenforceable for any reason, Participant shall not be entitled to the benefits under the Plan or as provided for in his or her Agreement and must return any sums received under the Plan or the Agreement unless Participant executes and effectuates an enforceable Release.

Section 3.05. Confidentiality. Participant shall be required to acknowledge that the terms and conditions of the Plan and the Agreement are confidential. Participant shall not disclose, publicize, or discuss any of the terms or conditions of the Plan or the Agreement with anyone, except his or her spouse, attorney, accountant, supervisor, or as required by law. In the event Participant discloses the Plan or the Agreement or any of their terms or conditions to his or her spouse, attorney, accountant, or supervisor, it shall be Participant’s duty to advise said individual(s) of the confidential nature of the Plan and the Agreement and to direct them not to disclose, publicize, or discuss any of the terms or conditions of the Plan with any other person. If Participant discloses, publicizes, or discusses any of the terms or conditions of the Plan or the Agreement with any other person, except his or her spouse, attorney, accountant, or supervisor, Participant will forfeit the right to all benefits to which he or she would have otherwise been entitled under the Plan and his or her Agreement.

ARTICLE IV

SOURCE OF PAYMENTS

Section 4.01. Unfunded Plan. All rights of a Participant or other person or entity having or claiming a right to payments under the Plan, if any, shall be entirely unfunded, and nothing in the Plan shall be construed to give such person or entity any right, title, interest, or claim in or to any specific asset, fund, reserve, account or property of any kind whatsoever, owned by the Company, or in which the Company may have any right, title or interest now or in the future.

Section 4.02. Employer Liability. At its own discretion, the Company may purchase such insurance or annuity contracts or other types of investments as it deems desirable in order to accumulate the necessary funds to provide for the future benefit payments under the Plan; provided, however, that: (a) the Company shall be under no obligation to fund the benefits provided under the Plan; (b) the investment of the Company’s funds credited to a special account established hereunder shall not be restricted in any way; and (c) such funds may be available for any purpose the Company may choose. Nothing stated herein shall prohibit the Company from adopting or establishing a trust or other means as a source for paying any obligations created hereunder; provided, however, that any and all rights that any Participants shall have with respect to any such trust or other fund shall be governed by the terms thereof.

Section 4.03. Establishment of Trust. Notwithstanding any provisions of this Article IV to the contrary, the Company may make contributions to a trust intended to qualify as a “grantor trust” under the Code, in such amounts and at such times as it shall determine in its complete discretion. The trust contemplated by this Section 4.03 is not intended to cause Participants to realize current income on amounts contributed thereto, and the trust shall be so interpreted.

ARTICLE V

PLAN ADMINISTRATION

Section 5.01. Administration of Plan. Administrator shall operate and administer the Plan and, as such, shall have the authority as Administrator to exercise the powers and discretion conferred on it by the Plan, including the right to delegate any function to a specified person or persons. Administrator shall discharge its duties solely in the interest of and for the exclusive purpose of providing benefits to Participants.

Section 5.02. Powers of Administrator. Administrator and any of its delegees shall administer the Plan in accordance with its terms and shall have all powers, authority, and discretion necessary or proper for such purpose. In furtherance of this duty, Administrator shall have the sole and exclusive power and discretion to make factual determinations, construe and interpret the Plan, including the intent of the Plan and any ambiguous, disputed or doubtful provisions of the Plan. Further, any individual serving in the capacity as Administrator shall be authorized to take any actions authorized under the Plan and any Agreement, including, without limitation, execution of any Agreement. All findings, decisions, or determinations of any type made by Administrator, including factual determinations and any interpretation or construction

of the Plan or an Agreement, shall be final, binding and conclusive on all parties and shall not be disturbed unless Administrator’s decisions are arbitrary and capricious. Administrator shall be the sole judge of the standard of proof required in any claim for benefits and/or in any question of eligibility for a benefit. By way of example, Administrator shall have the sole and exclusive power and discretion:

(a) to adopt such rules and regulations as it shall deem desirable or necessary for the administration of the Plan on a consistent and uniform basis;

(b) to interpret the Plan including, without limitation, the power to use Administrator’s sole and exclusive discretion to construe and interpret (1) the Plan, (2) the intent of the Plan, and (3) any ambiguous, disputed or doubtful provisions of the Plan;

(c) to determine all questions arising in the administration of the Plan including, but not limited to, the power and discretion to determine the rights or eligibility of any employee, Participant or other claimant to receive benefits under the Plan;

(d) to require such information as Administrator may reasonably request from any employee, Participant or other claimant as a condition for receiving any benefit under the Plan;

(e) to grant and/or deny any and all claims for benefits, and construe any and all issues of Plan interpretation and/or fact issues relating to eligibility for benefits;

(f) to compute the amount and determine the manner and timing of any benefits payable under the Plan;

(g) to execute or deliver any instrument or make any payment on behalf of the Plan;

(h) to employ one or more persons to render advice with respect to any of Administrator’s responsibilities under the Plan;

(i) to accelerate payments to Participants under the Plan;

(j) to direct the Company concerning all payments that shall be made pursuant to the terms of the Plan; and

(k) to make findings of fact, to resolve disputed fact issues, and to make determinations based on the facts and evidence contained in the administrative record developed during the claims review procedure.

For any acts not specifically enumerated above, when applying, construing, or interpreting any and all Plan provisions and/or fact questions presented in claims for benefits, Administrator shall have the same discretionary powers as enumerated above.

Section 5.03. Claims Administration. Administrator may appoint and, in its sole discretion, remove, a Claims Administrator and/or Claims Appeal Administrator to administer

claims for benefits under the Plan in accordance with its terms, and, pursuant to Section 5.02, such delegees shall have all powers, authority, and discretion necessary or proper for such purpose. In the absence of such appointment, Administrator shall be the Claims Administrator and Claims Appeal Administrator.

Section 5.04. Filing Benefit Claims. Any claim asserting entitlement to a benefit under the Plan must be asserted within ninety (90) days after the event giving rise to the claim by sending written notice of the claim to the Claims Administrator, in accordance with Section 7.01. The written notice of the claim must be accompanied by any and all documents, materials, or other evidence allegedly supporting the claim for benefits. If the claim is granted, the claimant will be so notified in writing by the Claims Administrator within the time period described below.

Section 5.05. Denial or Partial Denial of Benefit Claims. If the Claims Administrator denies a claim for benefits, in whole or part, the Claims Administrator shall notify the claimant in writing of the adverse benefit determination within ninety (90) days after the Claims Administrator has received the claim. In the Claims Administrator’s sole discretion, the Claims Administrator may determine that special circumstances require an extension of time for processing the claim. If such an extension is required, the Claims Administrator will notify the claimant of the extension in writing prior to the expiration of the initial ninety(90)-day period. Such notice shall include an explanation of the special circumstances requiring the extension and the date by which the Claims Administrator expects to render the benefit determination. In no event shall such extension exceed a period of ninety (90) days from the end of the initial claims period. The Claims Administrator will send the claimant written notification of its benefit determination if a claim is denied or partially denied. Such written notice shall contain:

(a) the specific reasons for the denial of the claim and reference to any pertinent Plan provisions on which the denial is based;

(b) if applicable, a description of any additional material or information necessary for claimant to perfect the claim and an explanation of why such material or information is necessary; and

(c) an explanation of the claims review appeal procedures including the name and address of the person or committee to whom any appeal should be directed, the time limits applicable to such procedures, and a statement that the claimant has a right to bring a civil action pursuant to Section 502(a) of ERISA following an adverse benefit determination on review.

Section 5.06. Appeal of Claims That Are Denied or Partially Denied. The claimant may request review of the Claims Administrator’s denial or partial denial of a claim for Plan benefits. Such request must be made in writing within sixty (60) days after claimant has received notice of the Claims Administrator’s adverse benefit determination and shall include any and all documents, materials, or other evidence which claimant believes supports his or her claim for benefits. The written request for an appeal, together with all documents, materials, or other evidence which claimant believes supports his or her claim for benefits should be addressed to the Claims Administrator, who will be responsible for submitting the appeal for review to the Claims Appeal Administrator. The Claims Appeal Administrator will consider all

documents, materials or other evidence submitted by the claimant, regardless of whether such evidence was considered during the claimant’s initial benefit determination. The claimant may request, free of charge, copies of all documents, records and other information relevant to his or her claim for benefits.

Section 5.07. The Appeal Process. The Claims Administrator will submit the appeal to the Claims Appeal Administrator for review of the denial or partial denial of the claim. Within sixty (60) days after the receipt of claimant’s appeal, claimant will be notified of the final decision of the Claims Appeal Administrator, unless, in the Claims Appeal Administrator’s sole discretion, special circumstances require an extension of this period for up to an additional sixty (60) days. If such an extension is required, the Claims Appeal Administrator shall notify claimant of this extension in writing before the expiration of the initial sixty (60)-day period. Such notice shall include an explanation of the special circumstances requiring the extension and the date by which the Claims Appeal Administrator expects to render the benefit determination.

ARTICLE VI

AMENDMENT AND TERMINATION

Section 6.01. General. This Plan document and the related Agreements and Releases set forth all of the provisions of the Plan shall supersede any and all provisions providing for severance, retention or change of control payments or benefits, if any, set forth in Participant’s Offer Letter and all other prior oral or written plans, agreements, communications, negotiations, commitments and understandings with respect to such payments or benefits. In the event of payment under the Plan, Participant shall not be entitled to further or additional retention or change of control payments or benefits and shall waive all claims related thereto, whether arising prior to or after the Effective Date. The provisions of this Article VI shall survive a termination of the Plan.

Section 6.02. Amendment and Termination. No amendment, modification, suspension or termination of the Plan (a) will be effective after the Effective Date; (b) may reduce the amount of benefits or adversely affect the manner of payment of benefits of any Participant then entitled to receive benefits in accordance with the terms of Article III; or (c) may adversely affect the rights of any Participant with respect to any payment made or benefit awarded under the Plan; provided, however, that any amendment, modification, suspension or termination shall be effective if such is agreed to in writing and signed by the affected Participant and by the Plan Administrator, or by their legal representatives and successors.

Section 6.03. Successors. ChipPAC shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) of all or substantially all of its business and/or assets to expressly assume the Plan and agree to perform the Company’s obligations under the Plan in the same manner such obligations would be performed if no such succession had taken place; provided, however, that for purposes of this Plan, the successor corporation shall be limited to the “Surviving Corporation.” (as defined in the Merger Agreement). Failure of ChipPAC to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of the Plan and shall entitle each Participant to compensation from ChipPAC in the same amount and on the same terms as he or

she would be entitled hereunder if each of the conditions set forth in Section 3.02 were satisfied. Any successor or surviving entity that assumes or otherwise adopts the Plan as contemplated in this Section 6.03 shall succeed to all the rights, powers and duties of ChipPAC and the Board hereunder, subject to the restrictions on amendment or termination of the Plan as set forth in Section 6.02.

Section 6.04. Termination. The Plan shall terminate upon the satisfaction of all obligations of the Company or its successor entities hereunder.

ARTICLE VII

MISCELLANEOUS

Section 7.01. Notices.

(a) Any notices or claims for benefits to Administrator under the Plan or the Agreement shall be (1) in writing; (2) deposited in the mail, first class, registered or certified, return receipt requested, with proper postage prepaid; and (3) addressed as follows, unless changed otherwise by Administrator in a writing addressed to Participant at the last known address in the possession of the Company:

Dennis W. Daniels

Vice President, Corporate Administration

and Human Resources

ChipPAC, Inc.

47400 Kato Road

Fremont, California 94538

(b) Any notices or claims decisions Administrator is required to provide under the Plan or the Agreement shall be: (1) in writing; (2) deposited in the mail, first class, registered or certified, return receipt requested, with proper postage prepaid; and (3) addressed to Participant at the last known address in the possession of the Company; provided, however, that payments shall be made in the manner provided in Section 3.03.

Section 7.02. Plan Provisions Control. The terms and conditions of the Plan shall be incorporated into the Agreement. In the event of a conflict between the provisions of the Plan and the Agreement, the provisions of the Plan shall control.

Section 7.03. No Alienation. No Participant shall have any right to assign, pledge, hypothecate, anticipate or in any way create a lien upon any amounts payable hereunder. No amounts payable hereunder shall be subject to assignment or transfer or otherwise be alienable, either by voluntary or involuntary act or by operation of law, except as may be otherwise required by law in connection with marital dissolution or child support obligations, or be subject to attachment, execution, garnishment, sequestration or other seizure under any legal, equitable or other process.

Section 7.04. No Mitigation. If Participant’s employment with the Company terminates, Participant is not required to seek other employment or to attempt in any way to

reduce any amounts payable to Participant pursuant to Article III of the Plan. Further, the amount of any payment made or benefit provided for under the Plan shall not be reduced by any compensation earned by Participant as the result of employment by another employer, by retirement benefits, or offset against any amount claimed to be owed by the Company; provided, however, that in the event that a Participant obtains subsequent employment during the period in which he or she is receiving payment of his or her COBRA premiums pursuant to Section 3.01(a)(3) or Section 3.01(b)(3) and he or she becomes eligible for health coverage from such subsequent employer, then the obligation of the Company to make payments of the COBRA premiums on Participant’s behalf shall automatically cease.

Section 7.05. Indemnification. To the extent not covered by insurance, or if there is a failure to provide full insurance coverage for any reason, and to the extent permissible under applicable laws and regulations, the Company agrees to hold harmless and indemnify Administrator and its members against any and all claims and causes of action by or on behalf of any and all parties whomsoever, and all losses therefrom, including, without limitation, costs of defense and attorneys’ fees, based upon or arising out of any act or omission relating to or in connection with the Plan and any related trust other than losses resulting from any such person’s fraud, breach of fiduciary duty or willful misconduct.

Section 7.06. No Right to Employment. Nothing in the Plan or the Agreement shall be deemed to give any person the right to be retained in the service of the Company, be deemed to interfere with the right of the Company to discharge any person, or in any other way to constitute a contract of employment.

Section 7.07. Limitations of Payment to Participants. Notwithstanding any other provision of the Plan, in the event that any payment (or portion thereof) to be made hereunder to a Participant would constitute a “parachute payment” for purposes of Section 280G(b)(2) of the Code, such payment (or portion thereof) shall be reduced so that the remaining portion of such payment (if any) does not constitute a parachute payment. In the event that more than one payment (or portion thereof) would constitute a parachute payment, the preceding sentence shall apply first to the payment (or portion thereof) that is payable last in time, and then to the payment payable next to last in time, and so forth until none of the remaining payments (or portions thereof) constitute parachute payments.

Section 7.08. Captions. The captions of the Plan are not part of the provisions of the Plan and shall have no force and effect.

Section 7.09. Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

Section 7.10. Governing Law. The administration of the Plan shall be governed by the laws of the State of Delaware, without regard to the conflict of law principles of any state, except to the extent the laws of the State of Delaware as applied to the Plan are preempted by ERISA. Any persons or corporations who now are or shall subsequently become parties to the Plan shall be deemed to consent to this provision.

ANNEX A

FORM OF RELEASE

I, , do hereby release and forever discharge as of the date hereof ChipPAC, Inc., a Delaware corporation, (the “Company”), and its subsidiaries and affiliates and all present and former directors, officers, agents, representatives, employees, successors and assigns of the Company and its subsidiaries and affiliates and the Company’s direct or indirect owners (collectively, the “Released Parties”) to the extent provided below.

1. I understand that any payments or benefits paid or granted to me pursuant to ChipPAC Inc.’s Employee Retention Plan (the “Plan”) represent, in part, consideration for signing this General Release. I understand and agree that I will not receive any payments or benefits pursuant to the terms of the Plan unless I execute this General Release and do not revoke this General Release within the time period permitted hereafter or breach this General Release. I also acknowledge and represent that I have received all payments and benefits that I am entitled to receive (as of the date hereof) pursuant to the Plan and other agreements or arrangements by virtue of any employment by the Company.

2. Except as provided in paragraph 4 below, I knowingly and voluntarily (for myself, my heirs, executors, administrators and assigns) release and forever discharge the Company and the other Released Parties from any and all claims, suits, controversies, actions, causes of action, cross-claims, counter-claims, demands, debts, compensatory damages, liquidated damages, punitive or exemplary damages, other damages, claims for costs and attorneys’ fees, or liabilities of any nature whatsoever in law and in equity, both past and present (through the date this General Release becomes effective and enforceable) and whether known or unknown, suspected, or claimed against the Company or any of the Released Parties which I, my spouse, or any of my heirs, executors, administrators or assigns, may have, which arise out of or are connected with my employment with, or my separation or termination from, the Company (including, but not limited to, any allegation, claim or violation, arising under: Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights Act and Women’s Equity Act of 1991; Sections 1981 through 1988 of Title 42 of the United States Code; the Equal Pay Act of 1963, as amended; the Occupational Safety and Health Act of 1970; the Americans with Disabilities Act of 1990; the Family and Medical Leave Act of 1993; the Consolidated Omnibus Budget Reconciliation Act of 1985; the Vocational Rehabilitation Act of 1973; the Worker Adjustment Retraining and Notification Act of 1988; the Employee Retirement Income Security Act of 1974; the Fair Labor Standards Act and the National Labor Relations Act, as amended, the California Fair Employment and Housing Act, the California Unruh Civil Rights Act, the California Equal Pay Law, any other federal or state anti-discrimination law or their state or local counterparts; or under any other federal, state or local civil or human rights law, or under any other local, state, or federal law, regulation or ordinance; any applicable Executive Order Programs; or under any public policy, contract or tort, or under common law; or arising under any policies, practices or procedures of the Company; or any claim for wrongful discharge of employment, breach of contract (both express and implied), breach of a covenant of good faith and fair dealing (both express and implied), negligent or intentional infliction of emotional distress, negligent or intentional misrepresentation, negligent or intentional interference with contract or prospective economic advantage, and defamation; or any claim relating to or arising from any alleged right to purchase, or actual purchase, of shares of stock of the Company; or any claim for salary, bonus, severance pay, pension, vacation pay, life insurance, health or medical insurance, or any other

A-1

fringe benefits, other than the payments and benefits provided for in or in accordance with the Plan or ChipPAC Inc.’s Special Bonus Plan, as the case may be; or any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; or any claim for costs, fees, or other expenses, including attorneys’ fees incurred in these matters) (all of the foregoing collectively referred to herein as the “Claims”).

3. I represent that I have made no assignment or transfer of any rig

4. In recognition of the consideration provided in the Agreement, I hereby release and discharge the Released Parties from any and all claims, actions and causes of action that I may have against the Released Parties arising under the U.S. Age Discrimination in Employment Act of 1967, as amended, and the applicable rules and regulations promulgated thereunder (“ADEA”). I acknowledge that I understand that ADEA is a federal statute that prohibits discrimination on the basis of age in employment, benefits and benefit plans.

By signing this Release, I hereby acknowledge and confirm the following:

(a) I am providing the release and discharge set forth in this Section 4 in exchange for consideration in addition to anything of value to which I am already entitled.

(b) I was hereby advised by the Company in writing to consult with an attorney of my choice prior to signing this Release and to have such attorney explain to me the terms of this Release including, without limitation, the terms relating to my release of claims arising under ADEA.

(d) I am aware that I have twenty-one days in which to consider the terms of this Release, which I have knowingly and voluntarily waived by accepting the terms of the offer as described herein. For a period of seven days following my acceptance hereof, I have the right to revoke the release contained in this Section 4 (the “Revocation Period”) commencing immediately following the date I sign and deliver this General Release to the Company. The Revocation Period shall expire at 5:00 p.m. P.S.T. on the last day of the Revocation Period; provided, however, that if such seventh day is not a business day, the Revocation Period shall extend to 5:00 p.m. on the next succeeding business day. No such revocation shall be effective unless it is in writing and signed by me and received by the Company prior to the expiration of the Revocation Period.

As set forth in section 7(f)(1)(C) of the ADEA, as added by the Older Workers Benefit Protection Act of 1990, I understand that I am not waiving any rights or claims provided under ADEA that may arise after this Agreement is executed by me.

5. In signing this General Release, I acknowledge and intend that it shall be effective as a bar to each and every one of the Claims hereinabove mentioned or implied. I expressly consent that this General Release shall be given full force and effect according to each

A-2

and all of its express terms and provisions, including those relating to unknown and unsuspected Claims (notwithstanding any state statute that expressly limits the effectiveness of a general release of unknown, unsuspected and unanticipated Claims), if any, as well as those relating to any other Claims hereinabove mentioned or implied. I acknowledge and agree that this waiver is an essential and material term of this General Release. I further agree that in the event I should bring a Claim seeking damages against the Company, or in the event I should seek to recover against the Company in any Claim brought by a governmental agency on my behalf, this General Release shall serve as a complete defense to such Claims. I further agree that I am not aware of any pending charge or complaint of the type described in paragraph 2 as of the execution of this General Release.

6. I represent that I am not aware of any claim by me other than the Claims that are released by this Agreement. I acknowledge that I may hereafter discover Claims or facts in addition to or different than those which I now know or believe to exist with respect to the subject matter of this General Release and which, if known or suspected at the time of entering into this General Release, may have materially affected this General Release and my decision to enter into it. Nevertheless, I hereby waive any right, Claim or cause of action that might arise as a result of such different or additional Claims or facts and I hereby expressly waive any and all rights and benefits confirmed upon me by the provisions of California Civil Code Section 1542, which provides as follows:

Being aware of such provisions of law, I agree to expressly waive and relinquish any and all rights and benefits I may have thereunder, as well as under any similar law or common law principle of similar effect of any state or territory of the United States with respect to the Claims released hereby.¹

7. I agree that neither this General Release, nor the furnishing of the consideration for this General Release, shall be deemed or construed at any time to be an admission by the Company, any Released Party or myself of any improper or unlawful conduct.

8. I agree that I will forfeit all amounts payable by the Company pursuant to this General Release if I challenge the validity of this General Release. I also agree that if I violate this General Release by suing the Company or the other Released Parties, I will pay all costs and expenses of defending against the suit incurred by the Released Parties, including reasonable attorneys’ fees, and return all payments received by me pursuant to this General Release.

¹	Insert comparable release language for employee residing or working in jurisdictions other than California.

A-3

9. I agree that this General Release is confidential and agree not to disclose any information regarding the terms of this General Release, except to my immediate family and any tax, legal or other counsel I have consulted regarding the meaning or effect hereof or as required by law, and I will instruct each of the foregoing not to disclose the same to anyone.

10. Any non-disclosure provision in this General Release does not prohibit or restrict me (or my attorney) from responding to any inquiry about this General Release or its underlying facts and circumstances by the Securities and Exchange Commission (SEC), the National Association of Securities Dealers, Inc. (NASD), any other self-regulatory organization or governmental entity.

11. I agree to reasonably cooperate with the Company in any internal investigation or administrative, regulatory, or judicial proceeding. I understand and agree that my cooperation may include, but not be limited to, making myself available to the Company upon reasonable notice for interviews and factual investigations; appearing at the Company’s request to give testimony without requiring service of a subpoena or other legal process; volunteering to the Company pertinent information; and turning over to the Company all relevant documents which are or may come into my possession all at times and on schedules that are reasonably consistent with my other permitted activities and commitments. I understand that in the event the Company asks for my cooperation in accordance with this provision, the Company will reimburse me solely for reasonable travel expenses, including lodging and meals, upon my submission of receipts.

12. I agree not to disparage the Company, its past and present investors, officers, directors or employees or its affiliates and to keep all confidential and proprietary information about the past or present business affairs of the Company and its affiliates confidential unless a prior written release from the Company is obtained. I further agree that as of the date hereof, I have returned to the Company any and all property, tangible or intangible, relating to its business, which I possessed or had control over at any time (including, but not limited to, company-provided credit cards, building or office access cards, keys, computer equipment, manuals, files, documents, records, software, customer data base and other data) and that I shall not retain any copies, compilations, extracts, excerpts, summaries or other notes of any such manuals, files, documents, records, software, customer data base or other data.

13. Notwithstanding anything in this General Release to the contrary, this General Release shall not relinquish, diminish, or in any way affect any rights or claims arising out of any breach by the Company or by any Released Party of this General Release after the date hereof.

14. Whenever possible, each provision of this General Release shall be interpreted in, such manner as to be effective and valid under applicable law, but if any provision of this General Release is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this General Release shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

A-4

15. This General Release and the rights and obligations of the parties hereunder shall be governed by and construed and enforced in accordance with the laws of the State of California, without regard to principles of conflict of laws.

SIGNING THIS GENERAL RELEASE, I REPRESENT AND AGREE THAT:

(i)

I HAVE READ IT CAREFULLY;

(ii)

I UNDERSTAND ALL OF ITS TERMS AND KNOW THAT I AM GIVING UP IMPORTANT RIGHTS, INCLUDING BUT NOT LIMITED TO, RIGHTS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, AS AMENDED, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, AS AMENDED; THE EQUAL PAY ACT OF 1963, THE AMERICANS WITH DISABILITIES ACT OF 1990; AND THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED;

(iii)

I VOLUNTARILY CONSENT TO EVERYTHING IN IT;

(iv)

I HAVE BEEN ADVISED TO CONSULT WITH AN ATTORNEY BEFORE EXECUTING IT AND I HAVE DONE SO OR, AFTER CAREFUL READING AND CONSIDERATION I HAVE EITHER DONE SO OR CHOSEN NOT TO DO SO OF MY OWN VOLITION;

(v)

I HAVE HAD AT LEAST 21 DAYS FROM THE DATE OF MY RECEIPT OF THIS RELEASE SUBSTANTIALLY IN ITS FINAL FORM ON , TO CONSIDER IT AND THE CHANGES MADE SINCE SUCH VERSION OF THIS RELEASE ARE NOT MATERIAL AND WILL NOT RESTART THE REQUIRED 21-DAY PERIOD;

(vi)

ANY CHANGES TO THE AGREEMENT SINCE , EITHER ARE NOT MATERIAL OR WERE MADE AT MY REQUEST.

(vii)

I UNDERSTAND THAT I HAVE 21 DAYS AFTER THE EXECUTION OF THIS RELEASE TO REVOKE IT AND THAT THIS RELEASE SHALL NOT BECOME EFFECTIVE OR ENFORCEABLE UNTIL THE REVOCATION PERIOD HAS EXPIRED;

(viii)

I HAVE SIGNED THIS GENERAL RELEASE KNOWINGLY AND VOLUNTARILY AND WITH THE ADVICE OF ANY COUNSEL RETAINED TO ADVISE ME WITH RESPECT TO IT; AND

(ix)

I AGREE THAT THE PROVISIONS OF THIS GENERAL RELEASE MAY NOT BE AMENDED, WAIVED, CHANGED OR MODIFIED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE COMPANY AND BY ME.



DATE:

								Name:

A-5

EX-23.1 5 dex231.htm CONSENT OF PRICEWATERHOUSECOOPERS LLP Consent of PricewaterhouseCoopers LLP

Exhibit 23.1

Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 No. (333-54628) and Form S-3 No. (333-69704, 333-73674, 333-108236 and 333-112096) of ChipPAC, Inc. of our report dated February 19, 2004, relating to the financial statements and financial statement schedule, which appear in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

San Jose, California

March 12, 2004

EX-31.1 6 dex311.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 Certification of Chief Executive Officer pursuant to Section 302

Exhibit 31.1

CHIPPAC, INC.

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2003

I, Dennis P. McKenna, the Chief Executive Officer of ChipPAC, Inc., certify that:

1. I have reviewed this annual report on Form 10-K for the period ended December 31, 2003 of ChipPAC, Inc.;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



By:		/s/ DENNIS P. MCKENNA
		Dennis P. McKenna Chief Executive Officer

March 12, 2004

EX-31.2 7 dex312.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 Certification of Chief Financial Officer pursuant to Section 302

Exhibit 31.2

CHIPPAC, INC.

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2003

I, Robert Krakauer, the Chief Financial Officer of ChipPAC, Inc., certify that:

1. I have reviewed this annual report on Form 10-K for the period ended December 31, 2003 of ChipPAC, Inc.;

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ ROBERT KRAKAUER

Robert Krakauer

Chief Financial Officer and Executive Vice President

March 12, 2004

EX-32.1 8 dex321.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 Certification of Chief Executive Officer pursuant to Section 906

Exhibit 32.1

CHIPPAC, INC.

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2003

I, Dennis P. McKenna, in my capacity as Chief Executive Officer of ChipPAC, Inc., a Delaware corporation (“ChipPAC”), and in connection with the Annual Report on Form 10-K filed by ChipPAC with the Securities and Exchange Commission on March 12, 2004 (the “Report”), hereby certify that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of ChipPAC.

IN WITNESS WHEREOF, the undersigned has executed this CEO Certification as of the 12th day of March 2004.


		/s/ DENNIS P. MCKENNA
		Dennis P. McKenna
		Chief Executive Officer

EX-32.2 9 dex322.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 Certification of Chief Financial Officer pursuant to Section 906

Exhibit 32.2

CHIPPAC, INC.

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2003

I, Robert Krakauer, in my capacity as Chief Financial Officer of ChipPAC, Inc., a Delaware corporation (“ChipPAC”), and in connection with the Annual Report on Form 10-K filed by ChipPAC with the Securities and Exchange Commission on March 12, 2004 (the “Report”), hereby certify that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of ChipPAC.

IN WITNESS WHEREOF, the undersigned has executed this CFO Certification as of the 12th day of March 2004.

/s/ ROBERT KRAKAUER

Robert Krakauer

Chief Financial Officer and Executive Vice President

EX-99.1 10 dex991.htm RISK FACTORS Risk Factors

Exhibit 99.1

RISK FACTORS

You should carefully consider the following factors in addition to the other information set forth in this document in analyzing an investment in the Class A common stock, senior subordinated notes or the convertible notes and the common stock issuable upon conversion of the notes. We believe that the risks and uncertainties described below are the current material risks facing us, but they are not the only ones facing our company. Additional risks not currently known to us or that we currently believe are immaterial may impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations will likely suffer. In that case, the trading price of our publicly traded Class A common stock, 12¾% senior subordinated notes, 8% convertible subordinated notes or 2½% convertible subordinated notes could fall and you may lose all or part of the money you invested.

In addition, STATS and ChipPAC intent to file with the SEC a proxy statement/prospectus and other relevant materials in connection with the proposed merger involving STATS and ChipPAC pursuant to the terms of an Agreement and Plan of Merger and Reorganization among STATS and ChipPAC Merger, Inc., a wholly owned subsidiary of STATS, and ChipPAC. The proxy statement/prospectus will be mailed to the stockholders of ChipPAC respectively. ChipPAC stockholders are urged to read the proxy statement/prospectus and the other relevant materials when they become available because they will contain important information about ChipPAC and the proposed merger.

Risks Related to Our Business

We have been operating at a net loss for each year since the year ended December 31, 2001.

We have been operating at a net loss for each year since the year ended December 31, 2001. Our net losses for the years ended December 31, 2001, 2002 and 2003 were $93.7 million, $28.9 million and $28.8 million respectively. We cannot assure you when we may return to profitability.

We may not be able to continue to implement our cost saving strategy. Even if we do, it may not reduce our operating expenses by as much as we anticipated and could compromise the development of our business.

In 2002 and 2003, as a response to the weakness in demand for semiconductors, we implemented cost saving measures, including a significant reduction in our workforce, furloughs, reduced work shift schedules, reductions in discretionary spending, reduced materials cost and manufacturing overhead and redesign of our manufacturing processes to improve productivity. We cannot assure you that these cost saving measures will increase productivity or that any expected net savings will occur. In fact, our cost saving measures could adversely affect our revenue, as they could create inefficiencies in our business operations, result in labor disruptions and limit our ability to expand and grow our business.

The cyclicality of the semiconductor industry could adversely affect our operating results.

Our operations are substantially affected by market conditions in the semiconductor industry, which is highly cyclical and, at various times, has experienced significant economic downturns characterized by reduced product demand and production overcapacity which can result in rapid erosion of average selling prices. Since the end of 2000, we have been experiencing a general slowdown in the semiconductor industry. Starting in 2003, the semiconductor industry showed signs of recovery, and we expect conditions to continue to improve in 2004.

Our profitability is affected by average selling prices which tend to decline.

Decreases in the average selling prices of our packaging and test services can have a material adverse effect on our profitability. The average selling prices of packaging and test services have declined historically, with packaging services in particular experiencing severe pricing pressure. This pricing pressure for packaging and test services is likely to continue. Our ability to maintain or increase our profitability will continue to be dependent, in large part, upon our ability to offset decreases in average selling prices by improving production efficiency, increasing unit volumes packaged or tested, or by shifting to higher margin packaging and test services. If we are unable to do so, our business, financial condition and results of operations could be materially and adversely affected.

If we are unable to develop and market new technologies, we may not remain competitive within the semiconductor packaging industry.

The semiconductor packaging and test industry is characterized by rapid increases in the diversity and complexity of packaging services. As a result, we expect that we will need to continually introduce more advanced package designs in order to respond to competitive industry conditions and customer requirements. The requirement to develop, license and maintain advanced packaging capabilities and equipment could require significant research and development and capital expenditures in future years. Any failure by us to achieve advances in package design or to obtain access to advanced package designs developed by others could reduce our growth prospects and operating income.

The intensity of competition in our industry could result in the loss of our customers, which could adversely affect our revenues and profits.

We face substantial competition from a number of established independent packaging companies and from the internal capabilities of many of our largest customers. Each of our primary competitors has significant operational capacity, financial resources, research and development operations, and established relationships with many large semiconductor companies, which are current or potential customers of ours. Furthermore, our competitors may in the future capture our existing or potential customers through superior responsiveness, service quality, product design, technical competence or other factors, which we view as principal elements of competition in our industry. In addition, our primary customers may, in the future, shift more of their packaging and test service demand internally. As a result, we may have reduced revenues and profits.

Our research and development efforts may not yield profitable and commercially viable services; thus, we may have significant short-term research and development expenses, which will not necessarily result in increases in revenue.

Our research and development efforts may not yield commercially viable packages or test services. The qualification process for new customers is conducted in various stages which may take one or more years to complete, and during each stage there is a substantial risk that we will have to abandon a potential package or test service which is no longer marketable and in which we have invested significant resources. In the event we are able to qualify new packages, a significant amount of time will have elapsed between our investment in new packages and the receipt of any related revenues.

We could lose customers, and thus revenue, if we cannot maintain the quality of our services.

The semiconductor packaging process is complex and involves a number of precise steps. Defective packaging can result from a number of factors, including the level of contaminants in the operational environment, human error, equipment malfunction, use of defective materials and plating services and inadequate sample testing. From time to time, we expect to experience lower than anticipated yields as a result of these factors, particularly in connection with any expansion of capacity or change in processing steps. In addition, our yield on new packaging could be lower during the period necessary for us to develop the requisite expertise and experience with these processes. Any failure by us to maintain high quality standards or acceptable yields, if significant and sustained, could result in the loss of customers, delays in shipments, increased costs and cancellation of orders.

Our business may be adversely affected by the loss of, or reduced purchases by, any of our large customers. Additionally, we may encounter difficulties in soliciting new customers.

For the year ended December 31, 2003, sales to our top four customers in the aggregate accounted for approximately 50.0% of total net revenues. If any of our main customers were to purchase significantly less of our services in the future, these decreased levels of purchases could harm our operating results.

Semiconductor packaging companies must pass a lengthy and rigorous qualification process that can take up to six months at a cost to the customer of approximately $250,000 to $300,000. If we fail to qualify packages with potential customers or customers with which we have recently become qualified do not use our services, then our customer base could become more concentrated with a limited number of customers accounting for a significant portion of our revenues. Moreover, we believe that once a semiconductor company has selected a particular packaging and test foundry company’s services, the semiconductor company generally relies on that vendor’s packages for specific applications and, to the extent possible, subsequent generations of that vendor’s packages. Accordingly, it may be difficult to achieve significant sales from a particular or potential customer once it selects another vendor’s packaging services.

An economic or political crisis in Asia where our manufacturing facilities and most of our suppliers are located could prevent us from meeting the requirements of our customers and result in a decrease in our revenues.

Our manufacturing facilities are located in China, South Korea and Malaysia. Most of our materials suppliers are also located in Asia. For the years 2001 and 2002, over half of our substrate costs were incurred from the purchase of materials from South Korean suppliers, but in 2003, the purchase of materials from South Korean suppliers decreased to approximately one third of our total supply purchases. In the future, we expect that a growing portion of these materials will be supplied by sources in China, Taiwan and Southeast Asia. Several countries in this region have experienced currency devaluation and/or difficulties in financing short-term obligations. We cannot assure you that the effect of an economic crisis on our suppliers will not impact our operations, or that the effect on our customers in that region will not adversely affect both the demand for our services and the collectibility of receivables.

Furthermore, the region may suffer political unrest as a result of terrorist activity or armed conflict. Terrorist groups have been responsible for several kidnappings in and near Malaysia. In addition, North Korea’s decision to withdraw from the nuclear Non-Proliferation Treaty and related geopolitical maneuverings may escalate into war or otherwise adversely affect South Korea. Any disruption resulting from these events could cause significant delays in shipments of our products until we are able to shift our manufacturing facilities and supply sources to other locations.

Another outbreak of severe acute respiratory syndrome, or SARS, or any other disease epidemic, may adversely affect our business, financial condition and results of operations.

Another outbreak of SARS, or any other disease epidemic in Asia, could have a negative impact on commerce, travel, and general economic and industry conditions. Given the importance of our sales and manufacturing facilities in Asia, our business may be more exposed to this risk than the global economy generally. For example, an outbreak could result in quarantines or closures of our or our customers’ or suppliers’ facilities in Asia. The outbreak may also adversely impact our ability to purchase goods from suppliers in Asia. As a result of any disease epidemic, our business, financial condition and results of operations could be materially adversely affected.

The failure of our vendors to supply sufficient quantities of materials on a timely basis could prevent us from fulfilling our customers’ orders. In addition, we may not be able to pass on any unexpected increase in the cost of these materials to our customers.

We obtain materials to fill orders for our packaging and test services directly from vendors. To maintain competitive packaging operations, we must obtain from our vendors, in a timely manner, sufficient quantities of acceptable materials at expected prices. We source most of our materials, including critical materials like laminate substrates, lead frames, mold compounds and gold wires, from a limited group of suppliers. We purchase all of our materials on a purchase order basis and have no long-term contracts with any suppliers. From time to time, vendors have extended lead times or limited the supply of required materials to us because of vendor capacity constraints and, consequently, we have experienced difficulty in obtaining acceptable materials on a timely basis. Our business and results could be negatively impacted if our ability to obtain sufficient quantities of materials and other supplies in a timely manner were substantially diminished or if there were significant increases in the cost of materials that we could not pass on to our customers.

If we are unable to obtain capital equipment in a timely manner, we may be unable to meet the increased demands of our customers, which could result in a decrease in our revenues.

Our facilities currently have sufficient packaging and test services capacity to meet the current and expected demands of our customers. Nonetheless, in the event there are significant increases in overall semiconductor demand or demand for some of our products and services, we may not be able to meet those increased demands of our customers. Moreover, because the semiconductor packaging and test services business requires investment in expensive capital equipment and is characterized, from time to time, by intense demand, limited supply and long delivery cycles, we may not be able to readily increase our operating capacity. This would lead to a loss of sales of our packaging and test services, could ultimately lead to a loss in market share and have a negative impact on our results of operations.

We depend upon intellectual property and license critical technology from third parties in order to develop and provide advanced packaging technologies and designs for our customers. To the extent these licenses are not perpetual and irrevocable, our net revenues could be materially adversely affected if our rights under these licenses expire or are terminated. In addition, a dispute with a competitor relating to patent infringement could ensue that could be costly to us, could limit our use of some of our technology and processes or could require that we pay for a license to continue to use some of our technology and processes in a manner that we desire.

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. As of March 8, 2004, ChipPAC had 14 issued patents in Korea, 3 issued patents in the United States, 47 pending patent applications in Korea and 41 pending patent applications in the United States. We seek to protect our proprietary information and know-how through the use of trade secrets, confidentiality agreements and other security measures. We may not obtain patent protection for the patent applications that we file, or if we are granted patents, those patents may not offer meaningful protection. Further, no assurance can be made that the Asian countries in which we market our products will protect our intellectual property rights to the same extent as the United States. Additionally, we cannot assure you that our competitors will not develop, patent or gain access to similar know-how and technology, or reverse engineer our packaging services, or that any confidentiality agreements upon which we rely to protect our trade secrets and other proprietary information will be adequate to protect our proprietary technology.

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. To the extent these licenses are not perpetual and irrevocable, we believe that these licenses are renewable under normal commercial terms once they expire. However, we may be unable to utilize the technologies under these licenses if they are not extended or otherwise renewed or if any of these licenses are terminated by the licensor due to our uncured breach or bankruptcy. Alternatively, if we are able to renew these arrangements, we cannot assure you that they will be on the same terms as currently exist. Any failure to extend or renew these license arrangements could cause us to incur substantial liabilities and to suspend the packaging services and processes that utilized these technologies.

Our competitors in the semiconductor packaging and test industry hold numerous patents. Accordingly, there is a risk that, from time to time, a competitor may allege that the technology and processes that we use in our operations infringe upon one or more of that competitor’s patents. A dispute with a competitor relating to patent infringement could be costly to us, could limit our use of some of our technology and processes or could require that we pay for a license to continue to use some of our technology and processes in a manner that we desire.

The loss of our skilled technical, marketing and sales personnel or our key executive officers could have a material adverse effect on our research and development, marketing and sales efforts.

Our competitiveness will depend in large part upon whether we can attract and retain skilled technical, marketing and sales personnel and can retain members of our executive team. Competition for skilled personnel is intense, and we may not be successful in attracting and retaining the technical personnel or executive managers we require to develop new and enhanced packaging and test services and to continue to grow and operate profitably. If we cannot attract or retain skilled personnel, we may not be able to operate successfully in the future.

If we encounter future labor problems, we may fail to deliver our products in a timely manner, which could adversely affect our revenues and profitability.

Our employees at our Ichon, South Korea facility are represented by ChipPAC Korea Labor Union and are covered by collective bargaining and wage agreements. The wage agreement is renewed every year, and the collective bargaining agreement, which covers basic union activities, working conditions and welfare programs, among other things, is renewed every other year. Both agreements expired as of May 1, 2003, and we entered into new wage and collective bargaining agreements with the union in June 2003, which were retroactive to May 1, 2003. As of December 31, 2003, the ChipPAC Korea Labor Union represented approximately 64% of our South Korean employees. In addition, our Chinese subsidiary experienced labor protests and a two-day work stoppage in July 1998 in connection with proposed work force reductions. We cannot assure you that issues with the labor union or other employees will be resolved favorably for us in the future, that we will be successful in negotiating new wage and collective bargaining agreements, that we will not experience significant work stoppages in the future or that we will not record significant charges related to those work stoppages. In addition, potential efficiency enhancement efforts, including personnel reductions following our acquisition of the Malaysian business, may create the risk of labor problems in Malaysia or at other facilities.

New laws and regulations, currency devaluation and political instability in foreign countries, particularly in China, Malaysia and South Korea could make it more difficult for us to operate successfully.

For the years ended December 31, 2003, 2002 and 2001, we generated approximately 14.2%, 11.3% and 8.1% of total revenues, respectively, from international markets, primarily from customers in Southeast Asia and Europe. In addition, all of the facilities currently used to provide our 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. We cannot determine if our future operations and earnings will be affected by new laws, new regulations, a volatile political climate, changes in or new interpretations of existing laws or regulations or other consequences of doing business outside the U.S., particularly in China, Malaysia and South Korea. In particular, we risk terrorism against U.S. companies in Malaysia and the instability that would accompany any type of armed conflict with North Korea. If future operations are negatively affected by these changes, our sales or profits may suffer.

Fluctuations in the exchange rate of the U.S. dollar and foreign currencies could have a material adverse effect on our financial performance and profitability.

A portion of our costs are denominated in foreign currencies, like the South Korean Won, the Chinese Renminbi or RMB and the Malaysian Ringgit. As a result, changes in the exchange rates of these currencies or any other applicable currencies to the U.S. dollar will affect our costs 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 engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. However, we cannot assure you that any hedging technique we may implement will be effective. If it is not effective, we may experience reduced operating margins.

We could suffer adverse tax and other financial consequences if U.S. or foreign taxing authorities do not agree with our interpretation of applicable tax laws.

Our corporate structure is based, in part, on assumptions about the various tax laws, including withholding tax, and other relevant laws of applicable non-U.S. jurisdictions. We cannot assure you that foreign taxing authorities will agree with our interpretations or that they will reach the same conclusions. For example, the Korean National Tax Administration has informed us that it has made an assessment of approximately $13.4 million against us relating to withholding tax collected on a loan between our subsidiaries in Korea and Hungary. We believe that no withholding on the transaction in question is required under the prevailing tax treaty. We have appealed this assessment and believe it should be overturned. However, our interpretations are not binding on any taxing authority and, if these foreign jurisdictions were to change or to modify the relevant laws, we could suffer adverse tax and other financial consequences or have the anticipated benefits of our corporate structure materially impaired.

We entered into supply contracts with Intersil in connection with our acquisition of our Malaysian business and with Fairchild Semiconductor following Fairchild’s acquisition of Intersil’s discrete power business, and any decrease in the purchase requirements of Intersil or Fairchild or the inability of Intersil or Fairchild to meet its contractual obligations could substantially reduce the financial performance of our Malaysian subsidiary.

Historically, the Malaysian business generated all of its revenues from the sale of products and services to affiliated Intersil companies. The revenue of the Malaysian business for the first six months of 2000 prior to our acquisition of it and for all of 1999 was $41.9 million and $101.9 million, respectively. As a result of our acquisition of the Malaysian business, we have numerous arrangements with Intersil, including arrangements relating to packaging and test services as a vendor to affiliated Intersil companies and other services. Any material adverse change in the purchase requirements of Intersil or in its ability to fulfill its other contractual obligations could have a material adverse effect on our Malaysian subsidiary. Moreover, we may be unable to sell any products and services to affiliated Intersil companies beyond the term of our five-year supply agreement with Intersil.

In connection with Fairchild Semiconductor’s acquisition of Intersil’s discrete power business, we entered into an assignment agreement that assigned Intersil’s portion of the supply agreement relating to this business to Fairchild. We cannot assure you that Fairchild will perform under the supply agreement or that Intersil will perform under the supply and services agreements or that upon termination of these agreements we will be able to obtain similar services on comparable terms.

The agreement governing our senior credit facility and the indenture governing our 12¾% senior subordinated notes impose limitations on how we conduct our business; as a result, we may not be able to pursue strategies that could be in the best interests of holders of our stock.

The agreement governing our senior credit facility and the indenture governing our 12¾% senior subordinated notes contain restrictions on us that could increase our vulnerability to general adverse economic and industry conditions by limiting our flexibility in planning for and reacting to changes in our business and industry. Specifically, these restrictions limit our ability to:

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incur additional debt;

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pay dividends and make other distributions;

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prepay subordinated debt;

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make investments and other restricted payments;

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enter into sale and leaseback transactions;

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create liens;

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sell assets;

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enter into transactions with affiliates; and

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consolidate or merge.

Beginning with the quarter ending December 31, 2002, the financial covenants under our senior credit facility have consisted solely of a minimum interest coverage ratio and a maximum senior leverage ratio based on a rolling 12 months calculation. As a result of these restrictions, we may not be able to pursue business strategies that could be in the best interest of the holders of our notes and stock.

If we fail to comply with any of the restrictions in the senior credit facility, a default may also occur under the indenture governing our 12¾% senior subordinated notes and any other financing agreements. This default may allow some creditors, if their respective agreements so provide, to accelerate payments owed on such debt as well as any other indebtedness as to which a cross-acceleration or cross-default provision applies. The creditors who may be entitled to accelerated payments in the event of a default are the holders of our 12¾% senior subordinated notes and the senior credit facility lenders. As of December 31, 2003, the aggregate principal amount of the senior credit facility was $50.0 million, none of which was outstanding. In addition, our lenders may be able to terminate any commitments they had made to supply us with further funds. The consummation of our proposed merger with ST Assembly Test Ltd, or STATS, would constitute a default under the senior credit facility if we do not terminate the senior credit facility or obtain the consent of our lenders prior to the merger. We intend to terminate the senior credit facility immediately prior to the consummation of the merger.

We may not be able to consummate future acquisitions, and consequences of those acquisitions which we do complete may adversely affect us.

We plan to continue to pursue additional acquisitions of related businesses. The expense incurred in consummating the future acquisition of related businesses, or our failure to integrate those businesses successfully into our existing business, could result in our incurring unanticipated expenses and losses. We plan to continue to pursue additional acquisitions of related businesses in the future. We may be unable to identify or finance additional acquisitions or realize any anticipated benefits from those acquisitions.

Should we successfully acquire another business, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of our existing operations. Possible future acquisitions could result in the incurrence of contingent liabilities and amortization expenses related to goodwill and other intangible assets, all of which could have a material adverse effect on our financial condition and operating results.

In addition, we may finance future acquisitions with additional indebtedness. We have a substantial amount of outstanding indebtedness and will, subject to compliance with our debt instruments, have the ability to incur additional indebtedness. We will be required to generate cash flow from operations to service that indebtedness and there can be no assurance that we will generate sufficient cash flow to service that indebtedness. We may be required to refinance our indebtedness upon its maturity, and we cannot assure you that we will be able to refinance our indebtedness on terms acceptable to us, or at all.

A limited number of persons indirectly control us and may exercise their control in a manner adverse to your interests.

As of February 10, 2004, Citicorp Venture Capital, Ltd. and its affiliates owned or had the right to acquire 15,794,168 shares or approximately 16.2% of our outstanding Class A common stock. As of February 10, 2004, funds affiliated with Bain Capital, Inc. owned 6,260,397 shares or approximately 6.4% of our outstanding Class A common stock. By virtue of this stock ownership, these entities collectively have substantial power to direct our affairs and will be able to significantly affect the outcome of all matters required to be submitted to stockholders for approval, including the election of a majority of our directors, any merger, consolidation or sale of all or substantially all of our assets and amendment of our certificate of incorporation. Because a limited number of persons control us, transactions could be difficult or impossible to complete without the support of those persons. It is possible that these persons will exercise their control over us in a manner adverse to your interests. Citicorp Venture Capital, Bain Capital and their affiliates have agreed to vote their stock in favor of our proposed merger with STATS.

Environmental, health and safety laws could require us to incur capital and operational costs to maintain compliance and could impose liability to remedy hazardous substance contamination.

We are subject to a variety of environmental laws and regulations in the countries in which we have operations, including laws and regulations relating to the use, storage, discharge and disposals of hazardous materials and the chemical by-products of, and waste water discharges from their manufacturing, packaging, and testing processes. We may also be subject to liability under such laws and regulations for the investigation or cleanup of contamination caused by the release of hazardous materials in connection with current or historical operations at our facilities or offsite locations. While we believe that we are currently in material compliance with such laws and regulations, failure to comply with such laws and regulations in the future could subject us to liabilities that may have an adverse effect on our financial condition and results of operations. While we believe that we do not face material liabilities associated with contamination conditions and that we have contractual indemnification agreements with predecessors relating to such conditions, should these predecessors become unable or unwilling to address these conditions, or should other yet unknown conditions be identified in the future that are not subject to such indemnification agreements, we could face investigatory or remedial liabilities that may have an adverse effect on our financial condition and results of operation.

Risks Relating to our Notes

Our substantial indebtedness could adversely affect our financial health, make us vulnerable to adverse economic and industry conditions and prevent us from fulfilling our obligations under our notes.

As of December 31, 2003, we had total indebtedness of $365.0 million, stockholders equity of $95.0 million and a ratio of debt to equity of 3.8 to 1.0. Our substantial indebtedness could have important consequences to you. For example, it could:

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increase our vulnerability to general adverse economic and industry conditions by, among other things, limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

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require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thus reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;

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make it more difficult for us to satisfy our obligations with respect to the notes;

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place us at a competitive disadvantage relative to our competitors that have less debt; and

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limit, along with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds or pay cash dividends. Furthermore, failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations.

Despite our current levels of indebtedness, we still may be able to incur substantially more debt, which could increase the risks created by our substantial indebtedness described above.

The indentures governing our convertible notes does not contain any limitation on the amount of debt that we may incur. As a result, we may be able to incur substantial additional indebtedness in the future. Although the indenture governing the existing senior subordinated notes and the agreement governing our senior credit facility contain certain restrictions on our ability to incur additional debt, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these exceptions could be substantial. Also, such restrictions do not prevent us from incurring obligations that do not constitute indebtedness. For example, the indenture for the existing senior subordinated notes permits us to incur additional indebtedness if we meet a test measuring our cash flow relative to our required interest payments and, in any event, allows us to incur substantially more debt under our senior credit facility, which provides for revolving loans of up to $50.0 million, including letters of credit. We also have the ability to increase our revolving credit line by $25.0 million without further consent from our existing lenders. All of the borrowings under our senior credit facility are secured by our assets and those of our subsidiaries, except those of our Chinese operating subsidiary. The addition of new debt to our current debt levels could intensify the debt-related risks that we now face and that are described above.

We may not be able to generate the necessary amount of cash to service our indebtedness, which may require us to refinance our indebtedness or default on our scheduled debt payments. Our ability to generate cash depends on many factors beyond our control.

Our historical financial results have been, and our future financial results are anticipated to be, subject to substantial fluctuations. We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule or at all, or that future borrowings will be available to us under our senior credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. In addition, because our senior credit facility has variable interest rates, the cost of those borrowings will increase if market interest rates increase. If we are unable to meet our expenses and debt obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. We cannot assure you that we would be able to refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms, or at all, which could cause us to default on our obligations and impair our liquidity.

ChipPAC International Company Limited does not have an independent source of income from which to satisfy obligations of the 12¾% senior subordinated notes.

ChipPAC International Company Limited or ChipPAC International will rely on intercompany loans through its direct and indirect subsidiaries to satisfy obligations of its indebtedness; as a result, if these subsidiaries are not able to make payments on these intercompany loans, we may not be able to pay our noteholders interest on the 12¾% senior subordinated notes when due.

The only source of cash for ChipPAC International to pay principal and interest on the 12¾% senior subordinated notes will be through payments of interest and principal on intercompany notes, capital contributions from the parent company or dividends or distributions from ChipPAC International’s subsidiaries, which dividends or distributions would be funded through payments on intercompany notes.

We will rely principally on funds generated by ChipPAC International’s operating subsidiaries to fund payments on the notes and other indebtedness. If these subsidiaries are unable to make payments on their intercompany loans, we may not be able to satisfy obligations under our debt instruments, including payment of interest on the senior revolving credit facility and these 12¾% senior subordinated notes.

Our ability to pay our obligations under the 12¾% senior subordinated notes may be reduced because ChipPAC International’s Chinese operating subsidiary, which holds 22.1% of our consolidated assets and generated 17.0% of our consolidated revenue for the year ended December 31, 2003, is not a guarantor of the notes.

Our Chinese subsidiary is not a guarantor of the notes. For the year ended December 31, 2003, the total revenue for our Chinese subsidiary was $73.1 million, representing approximately 17.0% of our consolidated revenue. Our Chinese subsidiary had combined assets of approximately $128.1 million at December 31, 2003, representing approximately 22.1% of our consolidated assets.

Claims of creditors of our Chinese operating subsidiary, including trade creditors, secured creditors and creditors holding indebtedness or a guarantee issued by this subsidiary, will generally have priority on the assets and earnings of this subsidiary, over the claims of creditors of our company, including holders of our 12¾% senior subordinated notes, even if the obligations of our Chinese operating subsidiary do not constitute senior indebtedness. Since our Chinese subsidiary will not guarantee the 12¾% senior subordinated notes, holders of the notes will have to rely solely on dividends or distributions from the company’s Korean, Malaysian and British Virgin Islands subsidiaries to satisfy their respective obligations under the notes should our Chinese subsidiary be unable to make dividends or distributions.

Your right to receive payments on our convertible notes is junior to our existing and any future senior indebtedness. It is possible, therefore, that you may receive no compensation of any kind relating to the notes if there is a bankruptcy, liquidation or similar proceeding affecting us.

Our convertible notes are unsecured and subordinated in right of payment to all of our existing and future senior indebtedness. Generally, the indentures governing our convertible notes define senior indebtedness as all of our indebtedness other than any indebtedness that expressly states that it is subordinated to, or pari passu with, the notes. As a result, in the event of our bankruptcy, liquidation or reorganization or a similar proceeding relating to us or our property, or an acceleration of the notes due to an event of default, our assets will be available to pay obligations under the convertible notes only after all senior indebtedness has been paid in full, and therefore we may not have sufficient funds to satisfy our obligations relating to the notes. The convertible notes rank behind our guarantee of our subsidiary’s senior credit facility and existing 12¾% senior subordinated notes. In addition, the senior credit facility and the 12¾% senior subordinated notes are guaranteed by most of our other subsidiaries and the convertible notes do not have the benefit of any subsidiary guarantees. The convertible notes will also rank behind all of our future borrowings, except any future payable that expressly provides that it ranks pari passu with, or is subordinated in right of payment to, the notes.

In addition, all payments on the convertible notes will be blocked in the event of a payment default on our senior debt, including borrowings under our subsidiary’s senior credit facility and existing 12¾% senior subordinated notes, and may be blocked for specified periods in the event of non-payment defaults on certain senior debt.

As a holder of debt securities, you would typically have equal rights to your ratable share with other holders of debt of the same class as the notes, including both issuances of our convertible notes, of any assets remaining after we have paid off all of the debt senior to the notes. However, the indentures governing the convertible notes require that amounts otherwise payable to holders of the notes in a bankruptcy, liquidation or similar proceeding be paid to holders of debt senior to the notes instead. Consequently, holders of the convertible notes may receive less, ratably, than holders of trade payables or other debt of the same class in this type of proceeding.

We conduct all of our operations through our subsidiaries. The convertible notes are not guaranteed by any of our subsidiaries, and therefore the notes will be structurally subordinated to all liabilities of our subsidiaries, including our subsidiaries’ guarantees of the senior credit facility and 12¾% senior subordinated notes and their trade payables and claims of preferred stockholders, if any. Any right of ours to receive assets of any subsidiary upon its bankruptcy, liquidation, reorganization or similar proceeding, and the consequent right of the holders of the convertible notes to participate in those assets, will be subject to the prior claims of that subsidiary’s creditors.

As of December 31, 2003, the amount of our indebtedness which constitutes indebtedness senior to the convertible notes, including our guarantee of the senior credit facility and existing 12¾% senior subordinated notes, was $165.0 million. In addition, as of December 31, 2003, our subsidiaries had $256.1 million of outstanding indebtedness and other liabilities, including their guarantees of the senior credit facility and 12¾% senior subordinated notes, as well as trade payables. All of such indebtedness would be structurally senior to the convertible notes.

We are a holding company and conduct all of our operations through our subsidiaries, which may affect our ability to make payments on the convertible notes.

ChipPAC, Inc. is a holding company that derives all of its operating income from, and holds substantially all of its assets through, its subsidiaries, none of which guarantee the convertible notes. As a result of this structure, our cash flow and our ability to service our debt, including the notes, depend upon the earnings of our subsidiaries, and on the distribution to us of such earnings, or loans or other payments by our subsidiaries to us.

Our subsidiaries are separate and distinct legal entities that have no obligation to pay any amounts due on the convertible notes. Our subsidiaries are not required to provide us with funds for our payment obligations, whether by dividends, distributions, loans or other payments. In addition, any payment of dividends, distributions, loans or advances by our subsidiaries to us could be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries’ earnings and business considerations.

We may not have the ability to raise the funds necessary to finance the change of control offer required by the indentures governing the notes.

If the company undergoes a change of control (as defined in the indentures governing the notes) we may need to refinance large amounts of our debt, including our existing 12¾% senior subordinated notes, our convertible notes and borrowings under the senior credit facility. Our proposed merger with ST Assembly Test, Ltd. could cause a change of control under these debt instruments. If a change of control occurs, we may be required to offer to buy back our convertible notes for a price equal to 100.0% of the principal amount of the notes, plus any accrued and unpaid interest to the date of the purchase. In addition, if a change of control occurs, we must offer to buy back the 12¾% senior subordinated notes for a price equal to 101% of the principal amount of the notes, plus any accrued and unpaid interest. While the 12¾% 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 12¾% notes will choose to exercise such repurchase or “put” right.

We can give no assurance that the 12¾% 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 12¾% 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”. We cannot assure you that there will be sufficient funds available for us to make any required repurchases of the notes upon a change of control. In addition, our senior credit facility will prohibit us from repurchasing any notes until we first repay the senior credit facility in full, and

the indenture governing our 12¾% senior subordinated notes requires us to meet financial tests before prepaying subordinated debt like our convertible notes. If we fail to repurchase the notes in that circumstance, we will go into default under the indenture governing the notes and by virtue of the cross-default provisions contained in our other debt instruments, the senior credit facility and the indenture governing our existing 12¾% senior subordinated notes.

Any future debt which we incur may also contain restrictions on repayment upon a change of control. If any change of control occurs, we cannot assure you that we will have sufficient funds to satisfy all of the company’s debt obligations. These buyback requirements may also delay or make it harder for others to effect a change of control. In addition, certain other corporate events, such as leveraged recapitalizations, that would increase our level of indebtedness, would not constitute a change of control under the indenture governing the notes.

Federal and state laws allow courts, under specific circumstances, to void debts and require holders of debt securities to return payments received from debtors.

We used a significant portion of the net proceeds from the offering of the convertible notes to repay our existing senior credit facility. If a bankruptcy proceeding or a lawsuit is initiated by the company’s unpaid creditors, the debt which we incurred to repay our existing senior credit facility, including the convertible notes, may be reviewed under federal bankruptcy laws and comparable provisions of state fraudulent transfer laws. Under these laws, the debt of the company could be voided, or claims in respect of the debt could be subordinated to all other debt if, among other things, the company:

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received less than reasonably equivalent value or fair consideration for the incurrence of such debt;

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was insolvent or rendered insolvent by reason of such incurrence;

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was engaged in a business or transaction for which the remaining assets of the company constituted unreasonably small capital; or

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intended to incur, or believed that the company would incur, debts beyond our ability to pay such debts as they mature.

In addition, you may be required to return to a fund for the benefit of creditors any payments received from us in respect of the notes.

The measures of insolvency for these purposes will vary depending upon the fraudulent transfer law applied in any proceeding to determine whether such a transfer has occurred. Generally, however, a debtor would be considered insolvent if:

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the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets;

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the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on existing debts, including contingent liabilities, as they become absolute and mature; or

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it could not pay its debts as they become due.

On the basis of historical financial information, recent operating history and other factors, we believe that we are not insolvent, do not have unreasonably small capital for the business in which we are engaged and have not incurred debts beyond our ability to pay such obligations as they mature. We cannot assure you, however, as to what standard a court would apply in making such determination, or that a court would agree with our conclusion in this regard.

Risks Relating to ChipPAC, Inc.’s Class A Common Stock

Our stock price has fluctuated significantly in the past, and the market price of our Class A common stock may be lower than you expect.

Over the past two years, the price of our Class A common stock has fluctuated significantly, ranging from a low of $0.99 to a high of $12.55 per share. Fluctuations in our stock price could continue. Among the factors that could affect the stock price are:

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quarterly variations in our operating results;

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earnings below analysts’ estimates;

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rating changes by research analysts;

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strategic actions by us or our competitors, such as acquisitions;

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the financial performance of other publicly traded companies in our industry;

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general market conditions; and

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general economic factors unrelated to our performance.

The stock markets in general, and the markets for technology companies in particular, have experienced a high degree of volatility not necessarily related to the operating performance of particular companies. We cannot provide assurances as to our stock price.

Some of our long-time stockholders have the right to require us to register the public sale of their shares; all of our total outstanding shares of Class A common stock may be sold into the market; future sales of those shares could depress the market price of our Class A common stock.

As of February 10, 2004, we had 97,306,973 shares of our Class A common stock outstanding. All of these shares are freely tradeable without restriction under the Securities Act, except for any shares which may be held or acquired by an affiliate of our company, as that term is defined in Rule 144 promulgated under the Securities Act. We believe that affiliates hold or have the right to acquire approximately 22,941,117 shares of Class A common stock, and that those shares could only be sold over the next 12 months in accordance with the volume and manner of sale limitations set forth in Rule 144. Affiliates who hold approximately 22,049,884 shares of our Class A common stock are parties to agreements with us that provide for demand registration rights to cause us to register under the Securities Act all or part of their shares of our Class A common stock, as well as piggyback registration rights. Registration of the sale of these restricted shares of our Class A common stock would permit their sale into the market immediately. An affiliate of Citicorp Venture Capital, Ltd. holds $50.0 million principal amount of our 8% convertible notes which are convertible into approximately 5,020,081 shares of our Class A common stock. We have filed a registration statement which is currently effective with respect to those notes and the underlying shares of Class A common stock issuable upon conversion of those notes. If our stockholders sell a large number of shares, the market price of our Class A common stock could decline. Moreover, the perception in the public market that these stockholders might sell shares of our Class A common stock could depress the market price of the Class A common stock.

Provisions of our charter documents could discourage potential acquisition proposals and could delay, deter or prevent a change of control.

Provisions of our certificate of incorporation and by-laws may inhibit changes in control of our company not approved by our board of directors, and could limit the circumstances in which a premium may be paid for our Class A common stock in proposed transactions. These provisions provide for:

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a prohibition on stockholder action through written consents;

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a requirement that special meetings of stockholders be called only by our chief executive officer or the board of directors;

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advance notice requirements for stockholder proposals and nominations;

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limitations on the ability of stockholders to amend, alter or repeal the bylaws; and

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the authority of the board to issue, without stockholder approval, preferred stock with such terms as the board may determine.

Your right to receive payments on the Class A common stock is junior to the company’s existing and, possibly future, senior and subordinated indebtedness. It is possible, therefore, that you may receive no compensation of any kind relating to the Class A common stock if there is a bankruptcy, liquidation or similar proceeding affecting us.

The Class A common stock ranks behind all of our existing indebtedness, including our guarantees of our subsidiary’s obligations under the senior credit facility and our subsidiary’s 12¾% senior subordinated notes and our obligations under our 8% convertible notes. The Class A common stock would also rank behind our notes. The Class A common stock also ranks behind all of our future borrowings. As a result, upon any distribution to our creditors in a bankruptcy, liquidation or reorganization or similar proceeding relating to us or our property, we will have to pay the holders of debt in full before we can make any payment on the Class A common stock. Moreover, the Class A common stock will be structurally subordinated to all liabilities, including trade payables, of our subsidiaries, and upon their liquidation or reorganization, the rights of the holders of the Class A common stock to share in those assets would be subordinate to the claims of the subsidiaries’ creditors.

Risks Related to Our Proposed Merger with STATS

Failure to complete the merger could negatively affect the market price of ChipPAC stock, as well as adversely affect our financial results.

The obligations of ChipPAC and STATS to consummate the proposed merger are subject to the satisfaction or waiver of a number of closing conditions, including approval of their respective stockholders, expiration of waiting periods under the Hart-Scott- Rodino Act, receipt of a private letter ruling from the IRS or opinions of outside legal counsel relating to the tax treatment of the merger for ChipPAC stockholders and other customary conditions. If the merger is not consummated for any reason, ChipPAC will be subject to a number of material risks, including:

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we may be obligated to pay a termination fee of $40 million to STATS if the merger agreement is terminated in certain circumstances;

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the market price of our Class A common stock may decline to the extent that the current market price of the stock reflects a market assumption that the merger will be completed;

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costs related to the merger, such as legal and accounting fees and a portion of the investment banking fees, must be paid even if the merger is not completed;

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the failure to complete the merger could have an adverse effect on our relationships with employees, suppliers, customers, licensors and other business partners;

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benefits that we expect to realize from the merger would not be realized; and

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the diversion of management’s attention from the day-to-day businesses of ChipPAC and the unavoidable disruption to its employees and relationships with customers and suppliers during the period before consummation of the merger may make it difficult for us to regain our financial and market position if the merger does not occur.

If we are unsuccessful in addressing these risks, our business, financial condition and results of operations may be negatively impacted.

Need for governmental consents and approvals may prevent or delay consummation of the merger.

The obligations of STATS and ChipPAC to consummate the proposed merger are subject to the satisfaction or waiver of a number of closing conditions including, among others, receipt of all necessary consents and approvals. In particular, the merger is subject to review by the Antitrust Division and the Federal Trade Commission under the Hart-Scott-Rodino Act. Under this statute, STATS and ChipPAC are required to make pre-merger notification filings and to await the expiration or early termination of statutory waiting periods and clearance prior to completing the merger. STATS and ChipPAC are seeking to obtain all such required regulatory clearances prior to the scheduled completion of these transactions.

The reviewing authorities may not permit the merger at all or may impose restrictions or conditions on the merger that may seriously harm the combined company if the merger is completed. These conditions could include a complete or partial license, divestiture, spin-off or the holding separate of assets or businesses. While the merger agreement provides that STATS and ChipPAC must use their reasonable best efforts to obtain all regulatory clearances necessary for consummation of the merger, either STATS or ChipPAC may refuse to complete the merger if restrictions or conditions are required by governmental authorities that would require STATS or ChipPAC to divest any assets or license any technology that, individually or in the aggregate, would have a fair value in excess of $10,000,000 that would not be commercially reasonable. Any delay in the completion of the merger could diminish the anticipated benefits of the merger or result in additional transaction costs, loss of revenue or other effects associated with uncertainty about the transaction. STATS and ChipPAC also may agree to restrictions or conditions imposed by antitrust authorities in order to obtain regulatory approval, and these restrictions or conditions could harm the combined company’s operations. In addition, during or after the statutory waiting periods, and even after the completion of the merger, governmental authorities could seek to block or challenge the merger as they deem necessary or desirable in the public interest. In addition, in some jurisdictions, a competitor, customer or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin the merger, before or after it is completed. STATS, ChipPAC or the combined company may not prevail, or may incur significant costs, in defending or settling any action under such antitrust laws.

Failure to receive the private letter ruling from the IRS may delay or prevent the merger and, if the condition to the merger requiring receipt of the private letter ruling is waived, our stockholders could suffer negative tax consequences.

A condition to closing the merger is receipt by STATS and ChipPAC of the private letter ruling from the IRS or opinions from nationally recognized law firms that the exchange of our Class A common stock for STATS ADSs in the merger will not result in the recognition of gain under Section 367 of the Internal Revenue Code. STATS and ChipPAC made our request of the IRS for the private letter ruling. In the event that neither the private letter ruling nor the opinion can be obtained, the merger agreement may be terminated. There can be no assurance that the IRS will issue the private letter ruling prior to the STATS extraordinary general meeting and the ChipPAC special meeting, if at all. If the IRS does not issue the private letter ruling in a timely manner, or advises STATS and ChipPAC that it will not issue such letter, there can be no assurance that nationally recognized law firms would be able to give STATS and ChipPAC opinions in a timely manner, if at all. Consequently, assuming all other conditions to closing have been satisfied or waived, including the requisite STATS shareholder approvals and ChipPAC stockholder approvals, consummation of the merger may be materially delayed and/or the merger agreement may be terminated.

Any delay of the consummation of the merger could prevent us from realizing the expected benefits of the merger and could materially harm our business, financial results and prospects. In the event that neither the private letter ruling nor the opinion can be obtained, the merger agreement may be terminated.

If STATS and ChipPAC do not receive the private letter ruling or the opinions, both parties may agree to waive this closing condition and complete the merger. In such case, the exchange of ChipPAC Class A common stock for STATS ADSs will be a taxable transaction for U.S. holders of our Class A common stock.

Some of our directors and officers may have interests in the merger that may influence them to support the approval of the merger.

Some of our directors and officers participate in arrangements that provide them with interests in the merger that are different from the other shareholders of ChipPAC. These interests, which may influence these individuals to support the merger and the other transactions contemplated by the merger agreement, include the following:

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Mr. Dennis P. McKenna, currently our President, Chief Executive Officer and Chairman of the board of directors, will become Vice Chairman of the STATS board of directors when the merger becomes effective and will receive certain payments and benefits upon the consummation of the merger pursuant to his separation agreement;

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each of Dr. Conn, Mr. Norby and Dr. Park, currently directors of ChipPAC will become members of the STATS board of directors when the merger becomes effective; and

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certain officers of ChipPAC may be selected to participate in the ChipPAC, Inc. Employee Retention and Severance Plan, which provides for certain payments and benefits if the merger is consummated.

In addition, the surviving corporation in the merger will indemnify each present and former ChipPAC officer and director against liabilities arising out of such person’s services as an officer or director of ChipPAC and will maintain directors and officers liability insurance to cover any such liabilities for the next six years.

Whether or not the merger is completed, the announcement of the proposed merger may cause disruptions in ChipPAC’s business which could have material adverse effects on our operations.

Whether or not the merger is completed, the customers, suppliers or other strategic partners of ChipPAC, in response to the announcement of the merger, may terminate or cancel their existing relationships with us, or delay or defer decisions to enter into or to renew those arrangements, which could have a material adverse effect on ChipPAC’s business and, if the merger is completed, the business of the combined company. Similarly, current and prospective ChipPAC employees may experience uncertainty about their future roles with the combined company, which may adversely affect our ability to attract and retain key management, sales, marketing and technical personnel.

ChipPAC expects to incur significant transaction costs in connection with the merger whether or not the merger is completed, which could adversely affect the financial results of the company if the merger is not consummated for any reason.

ChipPAC expects to incur transaction costs of approximately $14.6 million in connection with the merger. These costs will be incurred whether or not the merger is ultimately consummated. If the merger is not consummated for any reason, these costs could materially harm ChipPAC’s financial results.

We may not be able to enter into a merger or business combination with another party at a favorable price because of restrictions in the merger agreement.

Provisions in the merger agreement prohibit us, subject to certain exceptions, from soliciting, initiating, encouraging or entering into certain other transactions, such as a merger, sale of assets or other business combination outside the ordinary course of business, with any third party other than STATS. These provisions may discourage other companies from proposing transactions that may be favorable to us and our stockholders. As a result, if the merger is not consummated, we may be at a disadvantage to our competitors.

ChipPAC may lose key personnel, customers and business partners due to uncertainties associated with the merger.

Current and prospective employees, customers and business partners of ChipPAC may experience uncertainty about their future relationship with ChipPAC or the combined company. Such uncertainty may adversely affect ChipPAC’s ability to attract and retain key management, sales, marketing and technical personnel. Current and prospective customers and business partners may, in response to the announcement or consummation of the merger, delay or cancel purchasing decisions. Any delay in, or cancellation of, purchasing decisions could adversely affect the business of ChipPAC.

The market value of STATS ADSs issued in the merger will depend upon their market price at the time of the merger, and no adjustment to the exchange ratio will be made as a result of changes in the market price of STATS ordinary shares or STATS ADSs.

If the merger occurs, upon completion of the merger, each share of ChipPAC Class A common stock will be exchanged for 0.87 STATS ADSs. The exchange ratio is fixed and will not be adjusted for changes in the market price of shares of ChipPAC Class A common stock, STATS ordinary shares or STATS ADSs. As a result, the specific dollar value of STATS ADSs that ChipPAC stockholders will receive and that STATS shareholders will retain upon completion of the merger will depend upon the market value of STATS ADSs when the merger is completed. The market prices of STATS ordinary shares, STATS ADSs and shares of ChipPAC Class A common stock fluctuate based on general market and economic conditions, STATS’ and ChipPAC’s business and other factors, and have experienced significant volatility. No predictions or assurances can be made as to the market price of STATS ordinary shares or STATS ADSs at any time before or after the completion of the merger and, therefore, the STATS ADSs that ChipPAC stockholders will receive in the merger cannot be valued with any degree of certainty.

The combined company may face challenges in integrating ChipPAC with STATS and, as a result, may not realize the expected benefits of the merger.

The combined company may not be successful in integrating the businesses of STATS and ChipPAC. Integrating the two companies’ operations and personnel will be a complex process. The integration may not be completed rapidly and may not achieve the anticipated benefits of the merger. The successful integration of the two companies’ businesses will require, among other things, the following:

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integration of the two companies’ products and services, sales and marketing, information and software systems and other operations;

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retention and integration of management and other employees;

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achievement of the expected cost savings;

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coordination of ongoing and future research and development efforts and marketing activities;

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retention of existing customers of both companies and attraction of additional customers;

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retention of strategic partners of each company and attraction of new strategic partners;

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developing and maintaining uniform standards, controls, procedures and policies;

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minimization of disruption of the combined company’s ongoing business and distraction of its management; and

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limiting expenses related to integration.

The successful integration of the two companies will involve considerable risks and may not be successful. These risks include:

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the impairment of relationships with employees, customers and business partners;

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the potential disruption of the combined company’s ongoing business and distraction of its management;

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the difficulty of incorporating acquired technology and rights into the products and service offerings of the combined company; and

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unanticipated expenses and potential delays related to the integration of STATS and ChipPAC.

The combined company may not succeed in addressing these risks or any other problems encountered in connection with the merger. The diversion of the attention of management and any difficulties encountered in the process of combining STATS and ChipPAC could cause the disruption of, or a loss of momentum in, the activities of the combined company’s business. Further, the process of combining ChipPAC’s business with STATS’ business could negatively affect employee morale and STATS’ ability to retain some key STATS and ChipPAC employees after the merger. If the anticipated benefits of the merger are not realized or the combined company is unsuccessful in addressing the risks related to the integration, the combined company’s business, financial condition and results of operations may be negatively impacted.

If the combined company is unable to take advantage of opportunities to market and sell STATS’ and ChipPAC’s products and services to the other’s traditional customers, the combined company may not realize some of the expected benefits of the merger.

Prior to the merger, STATS and ChipPAC have each maintained separate and distinct customer bases and business partners specific to their respective businesses. Following the merger, the combined company expects to take advantage of the customer bases of the formerly separate businesses in order to promote and sell the products and services of one company to the traditional customers and business partners of the other company. In the event that the traditional customers and business partners of either STATS or ChipPAC are not receptive to the products and services of the other, the combined company may not realize some of the expected benefits of the merger, and the business of the combined company may be harmed.

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