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U.S. SECURITIES AND EXCHANGE
COMMISSION


Washington, DC 20549





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Form 10-K





xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended: March 31, 2002





OR





 ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the transition period from
             to





Commission File Number: 0-15449





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CALIFORNIA MICRO DEVICES CORPORATION


(Exact name of registrant as specified in its charter)





California

94-2672609(State or other jurisdiction of incorporation)

(IRS Employer Identification No.)





215 Topaz Street, Milpitas, CA

95035-5430(Address of principal executive offices)

(Zip code)





Registrants telephone number, including area
code:


(408) 263-3214





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


None





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


Common Stock





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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 files pursuant to Item 405 of Regulation S-K (Section 209.405 of this chapter) is not contained herein, and will not be contained to the best of registrants knowledge, in any definitive proxy or information
statement incorporated by reference in Part II of this Form 10-K or any amendment to this Form 10-K.  Yes  x  No  ̈





The aggregate market value of
the voting stock held by non-affiliates of the Registrant as of May 31, 2002, was approximately $44.0 million based upon the last sale price of the common stock reported for such date on the Nasdaq National Market System. For purposes of this
disclosure, common stock held by persons who hold more than 5% of the outstanding voting shares and common stock held by executive officers and directors of the Registrant have been excluded in that such persons may be deemed to be
affiliates as that term is defined under the rules and regulations promulgated under the Securities Act of 1933. This determination of affiliate status is not necessarily a conclusive determination for other purposes.





As of May 31, 2002, the number of shares of the Registrants common stock outstanding were 13,905,590.





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DOCUMENTS INCORPORATED BY REFERENCE





The Proxy Statement for the Registrants Annual Meeting of Shareholders to be held August 7, 2002.





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This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Act of 1934, as amended. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements are not
historical facts and are based on current expectations, estimates, and projections about our industry; our beliefs and assumptions; and our goals and objectives. Words such as anticipates, expects, intends,
plans, believes, seeks, and estimates, and variations of these words and similar expressions are intended to identify forward-looking statements. Examples of the kinds of forward-looking statements in
this report include statements regarding the following: (1) our concentrating on major worldwide electronic system manufacturers has greater long-term business potential despite a longer design-in cycle, (2) the trend of shifting from original
equipment manufacturing toward the use of contract manufacturing within our customer base will continue, (3) international sales will continue to represent a significant portion of our sales for the foreseeable future, (4) chipscale packages will
represent an increasing portion of our business, (5) the thin film market will become more competitive, (6) we will continue transferring our testing and shipping operations to foreign subcontractors, (7) our plan to outsource an increasing portion
of our wafer fabrication to third party foundries, (8) our ability to reduce our spending levels and the sufficiency of our cash reserves to meet our capital requirements, (9) our believe that we have sufficient financial resources for the next 12
months, (10) our ability and projections to become profitable, (11) expected revenue levels, (12) our expected gross margin improvement, (13) our belief that we have meritous defenses to pending litigation claims, (14) our believe that a single
application specific integrated passive device offers a lower cost solution to customers, and (15) market acceptance of our services and products and the development of new services. These statements are only predictions, are not guarantees of
future performance, and are subject to risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the
forward-looking statements. These risks and uncertainties include, but are not limited to, our acceptance by major worldwide electronic system manufacturers, our ability to increase our market penetration, future growth of the markets for our
products, that design wins and bookings will translate into orders, that product demand combined with little price erosion will cause our revenues to increase, that our gross margin will increase, and that our third party vendors will be able to
make products without yield issues to satisfy product demand, as well as other risk factors detailed in this report, especially under the caption Risk Factors: under Item 1. Business. Except as required by law, we undertake no obligation to
update any forward-looking statement, whether as a result of new information, future events, or otherwise.





In this report, CAMD, we, us and our refer to California Micro Devices Corporation. All trademarks appearing in this report are the property of their respective owners.





PART I





ITEM 1.Business.





Introduction





We are a leading supplier of application specific integrated passive (ASIP TM ) devices and complementary analog semiconductors. Our products provide critical signal integrity, electromagnetic interference (EMI) filtering,
electrostatic discharge (ESD) protection, and power management solutions that enable high growth applications including PCs, wireless communication devices and consumer electronic products. Through proprietary manufacturing processes, we integrate
multiple passive components onto single chips and often enhance their functionality with the integration of discrete semiconductor functions to provide single chip solutions for densely populated, high performance electronic systems. Our ASIPs are
significantly smaller and provide more functionality than competitive solutions using discrete products. ASIPs replace functional clusters of discrete passive components that are used for signal filtering and termination at buses and I/O ports, wave
shaping, clock signal filtering, biasing, and other traditional discrete component functions.




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We also offer analog semiconductor solutions that complement our ASIP devices,
providing electrostatic discharge protection for ports, smart power management functions and micro-power operational amplifiers.





We focus our expertise on providing high volume, cost effective, general customer solutions for computer systems and peripherals, mobile electronics such as wireless handsets, personal digital assistants (PDA) and other portable
electronic devices and LED lighting applications. Our customers include original equipment manufacturers, such as Intel, Legend, Compaq, Dell, IBM, Acer, Guidant Corporation, Lumileds, Motorola, Kyocera-Wireless and 3Com Corporation, and contract
manufacturers, including Flextronics, Sanmina, Jabil, Celestica, Inc. and Solectron Corporation, and original design manufacturers including Arima, Compal, Quanta and Wistron.





We were incorporated in 1980 and have been a public company since 1986.





Industry Background





Passive componentsprincipally resistors and capacitorsare
used in virtually all electronic products. Resistors impede the flow of electrical current and dissipate electrical energy as heat. They are used to divide voltage, pull-up/pull-down voltage, and terminate and control current. Capacitors store
electrical charges and pass alternating current while blocking direct current. Capacitors are used to filter noise and shape waveforms. Historically, passive components have been discrete devices that perform one specific function per device.
Individually and in combination, resistors and capacitors are used to filter, condition, shape, bias, terminate and improve the characteristics of the electrical signals used and transmitted by active components such as microprocessors, application
specific integrated circuits, dynamic random access memories, and analog integrated circuits.





The demand for
discrete and integrated passive components is being driven by both the increasing number of components per system, and the increasing number of systems produced. For example, the number of passive components in a personal computer increased from a
few hundred in the 486 generation of personal computers to over 1,000 in the Pentium IV series of personal computers. Similar trends are occurring in mobile phones, where multiple bands, new functionality and higher frequencies are driving the
number of passive components from 300 in older analog phones to 600 in current versions.





The technological
progress of the semiconductor industry has been the driving force behind the electronics industry, and higher levels of integration on a single chip have been the underlying factor that has made this possible. Higher levels of integration lead to
smaller products with higher performance and functionality and lower cost. These feature rich, highly integrated processors and system-on-a-chip (SOC) solutions typically operate at faster speeds and are produced in very fine, sub-micron
manufacturing processes. As a result, these devices tend to be more susceptible to the types of signal integrity, EMI, ESD and power management issues that our ASIPs and analog semiconductors are designed to protect against.





Industry Challenges





Some of the fastest growing segments of the electronic products markets are:





| |  |  | mobile electronics including wireless handsets, PDAs and other portable electronic devices;
| | - |  | -------------------------------------------------------------------------------------------




| |  |  | personal computers and peripherals, set-top boxes and game consoles; and
| | - |  | ------------------------------------------------------------------------




| |  |  | high brightness LED lighting applications including LCD display backlighting, electronic signs, automotive headlamp and interior lighting, traffic lights and
other commercial and consumer lighting applications.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The technological advances in these
market segments have allowed electronic product manufacturers to address the demands of consumers by designing products with the following characteristics:




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Reduced Size and Weight.    Consumer demand for
smaller, more portable products has created a need to reduce the size of components used in their manufacture and minimize the required space between components. For example, notebook computers and wireless handsets have continued to get smaller and
lighter while the functionality of these products has increased dramatically.





Increased Performance and
Functionality.    The continuing trend of faster bus speeds and more highly integrated application specific integrated circuits (ASIC) in PCs and mobile electronics are served by a new generation of semiconductors
produced in increasingly smaller levels of sub-micron process geometries. These new processors and SOC solutions are much more sensitive to ESD, EMI, noisy data lines and fluctuations in power supply and as such require even more passive components
to protect them and provide for proper operation.





Shorter Time to
Market.    The rapid changes in technology and intense competition have shortened product life cycles dramatically and required manufacturers to seek shorter time to market. Products such as personal computers and
wireless handsets are replaced by newer versions as frequently as every six to nine months, requiring new products with new functions to quickly ramp into high volume production.





Lower Total Cost.    Manufacturers of electronic systems are facing intense price competition and are seeking ways of lowering the overall
cost of their products. In addition to reducing bill-of-material (BOM) component costs, increasing attention is being paid to reducing manufacturing costs, inventory costs and overhead associated with the procurement process. As a result, more
attention is being paid to the selection of highly integrated, general customer solutions from vendors that can provide a range of solutions. Lowering the cost of electronic systems is fundamental to increasing their affordability and allowing them
to be applied to new tasks, which allows more people access to better, faster technology.





As discussed below,
discrete passive components, because of their total solution form factor and performance characteristics, do not effectively meet these needs of system designers.





Our Solution





We meet the needs of electronic system
manufacturers through our innovative approach of integrating passive components and our patented technique of combining these integrated passive components with semiconductors. Our thin film technology allows us to combine multiple resistors,
capacitors and diodes into a single, high-density device we market as ASIP devices. We also design and manufacture analog semiconductors that provide power management functions, and offer low voltage, micro power operational amplifiers that we can
enhance by adding passive devices. We believe our products provide the following key benefits to our customers:





Smaller Size for Miniaturization and Portability.Our integration of multiple passive components into a single ASIP device with a chipscale package (CSP) reduces the area required for the passive
components by as much as 90% compared to discrete passive components. Discrete passive components typically consume a significant part of the space in an electronic system, limiting either the ability to reduce product size or to incorporate
additional features. For example, in a typical mobile phone, as much as two thirds of the printed circuit board area is consumed by passive components.





Increased Performance at Higher Frequencies.Our family of EMI filter products operates properly at up to ten times the frequency of traditional discrete
components, and can suppress electromagnetic interference/radio frequency interference noise by as much as ten times more than combinations of thick film components at very high frequencies. The operating frequency range of our ASIP devices is
further extended when combined with our CSP technology.




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Improved Electrostatic Discharge
Protection.We produce a family of application specific, general customer, ESD protection devices that combine electrostatic discharge protection with passive and active functions. For example, the
CSPEMI306A chipscale solution integrates 30 discrete components and provides robust ESD protection as well as EMI filtering for dataports on wireless handsets and PDAs. We continue to enhance these products to meet increasingly stringent industry
requirements for electrostatic discharge protection. We also combine our electrostatic discharge protection device with resistors and capacitors to make very high performance filters for electromagnetic interference reduction and electrostatic
discharge protection.





Shorter Time to Market.We design application
specific, general customer solutions that assist design engineers in their efforts to bring products to market more quickly. These solutions eliminate the need for engineers to design, layout and test their own solution using numerous discrete
components. For example, our PACVGA200 is a single component that integrates a total of 34 discrete active and passive components that provide a complete solution for level translation of DDC signals, ESD protection and termination for PC video
graphic applications.





Lower Total Cost Solutions.We
offer a lower total cost solution compared with most discrete passive component manufacturers by integrating multiple passive and active components into a single chip. Taking into account the per component costs of manufacturing insertions and cycle
time, testing, repair/rework, warranty, and the overhead associated with procuring and stocking in inventory multiple discrete passives from multiple vendors, we believe a single ASIP device offers an overall lower cost solution even though the
materials cost of the discrete passive components is usually less. As noted above, our CSPEMI306A device replaces 30 discrete components in a single low cost CSP device.





Lower Power Consumption and Enhanced Power Management.We have developed a product family using low power CMOS technology to address
the problems associated with smart power management techniques and power regulation. These devices include very low drop out (LDO) voltage regulators for PCs and mobile electronics as well as a number of power management devices with additional
integrated functionality and enhanced performance. In addition, we build small, cost effective operational amplifiers that are designed to operate in low power, hand held devices that must conserve battery
power.





Our Strategy





Our strategy is to utilize our strengths in manufacturing process technology, product architectures, analog design skills and chipscale
packaging to develop highly integrated, application specific general customer solutions for the mobile electronics, computing and LED lighting markets. We will seek opportunities to produce highly integrated solutions comprised of multiple passive
and active components, as well as analog semiconductor products targeting advanced power management functions that provide our customers superior value via enhanced performance and/or functionality, reduced solution form factor and lower total
implementation costs. Our strategy includes the following key elements:





Leverage Our Technology Leadership
Position.    We intend to continue to use our extensive manufacturing process expertise in combination with our analog semiconductor design skills to create value-added devices for our customers. In passive components, we
provide higher levels of integration by using our thin film and semiconductor capabilities. We use our product development capability and system level expertise to design products that are application specific solutions to customer problems, as
opposed to providing discrete components from which customers construct their own solution. Using our ability to combine passive components with semiconductors, we are developing new semiconductor products in power management, micro power
amplifiers, electrostatic discharge protection, as well as custom applications. We are leveraging our success with power management products into additional products and applications where we have the opportunity to achieve a leadership position.




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Focus on High Volume Solutions.    We focus on
manufacturers of products in growth markets such as personal computers, mobile electronics, and high brightness LED lighting applications, all of which have an increasing need for higher density and higher performance passive components and advanced
power management solutions. We work with customers to identify product opportunities that address current and emerging general customer application needs and which can be ramped quickly to high unit volume
manufacturing.





Focus Sales Activity
on Strategic Accounts.We have adopted a strategic customer model as a basis for structuring our sales organization. Our account focus in each target market is directed at market and technology leaders. We have assigned senior direct sales
personnel to cover these strategic accounts and work in concert with manufacturing sales representatives to provide comprehensive sales and technical support. Over the last year, we have expanded both the breadth and intensity of our sales coverage.
We have added field sales and application engineering personnel in Taiwan and Korea. In addition, we added an area manager covering Europe. We have brought on board new sales representative firms to extend our coverage in Japan, Europe and Southeast
Asia.





To support our enhanced sales efforts and to define more new products, we have re-aligned our internal
marketing organization to match our market focus on mobile electronics, computing and LED lighting. Within this structure, we have added marketing personnel with market and application specific knowledge to match our focused efforts.





Develop Standard Products to Shorten Customer Time to Market.    Our emphasis is to identify,
design and market application specific solutions for high volume markets. As such we seek areas where we can apply our core engineering and manufacturing strengths to develop a solution that provides the customer with superior value as a result of
features, performance, form factor and solution cost. By focusing on our development efforts on current and emerging architectures within our targeted markets, we can anticipate our customers needs and can offer value-rich solutions with much
less leadtime and expense than associated with custom or semi-custom product.





Educate the Market on Our
Value Proposition.    We are educating the market that our integrated devices are a lower total cost solution than discrete passive components when the total cost of manufacturing and support is considered. We have also
adopted a market pricing approach to make our solutions more attractive in connection with certain high volume market opportunities.





Move to a Fab-lite Manufacturing Model That Combines High Volumes With Lower Costs.    We have adopted a fab-lite manufacturing model that involves the use of foundry partners to provide the
majority of our wafer capacity while still maintaining an owned wafer fab for production of products with high margin but lower unit volume, products requiring proprietary manufacturing processes and for the purpose of product and process
development. Extensive use of external foundry partners permit us to rapidly scale unit volumes of products targeted at high volume markets such as PCs and wireless handsets. Additionally, the extensive use of foundry partners within our
manufacturing mix permits us to reduce our fixed costs while at the same time lowering our variable product costs.





Extensive Use of Chipscale Technology.We make extensive use of chipscale assembly technology to produce ASIP and analog semiconductor solutions that feature industry leading reduced-scale form
factors and best of class performance. We use Ultra CSP TM (a registered trademark of Kulicke and
Soffas Flip Chip Technologies division) manufacturing technology, produced under license from Kulicke and Soffas Flip Chip Technologies division, that allows us to eliminate external packaging and produce solutions whose form factors are
defined by the dimension of the bare die. Additionally, by eliminating the wire bonding associated with traditional packaging, we can reduce the effects of parasitic inductance and produce products exhibiting industry leading EMI filtering
performance.




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Our Competitive Advantages





We believe that we have the following competitive advantages that will assist us in implementing solutions to satisfy our customers needs:





Product Development Expertise.    Our product development engineers and marketing managers define high
volume, application specific solutions that provide superior value to customers in our core markets of mobile electronics, computing and LED lighting. We focus on market specific, general customer solutions that can achieve wide design acceptance
and high manufacturing unit volume. Traditional passive component manufacturers provide components from which customers construct their own custom solution. Our product develop strategies lead us to develop highly integrated ASIP and analog
semiconductor devices to provide ready-made solutions for our customer for many current and emerging applications. Additionally, our analog design expertise permits us to extend the functional integration levels of our ASIP products while also
producing a highly competitive line of analog semiconductors that perform advanced power management functions.





Manufacturing Strategy.    As part of our fab-lite manufacturing strategy, we have retained Advanced Semiconductor Manufacturing Corporation (ASMC) in Shanghai, China to manufacture wafers
utilizing our own manufacturing processes under a limited license from us. Additionally, we plan to utilize ASMCs standard CMOS processes to support current and future analog semiconductor products. We anticipate also working with additional
third party foundry partners, increasing the percentage of wafer starts allocated to our foundry partners and allowing us to efficiently scale capacity to meet our needs while reducing our fixed and variable costs associated with manufacturing our
products and reducing our dependence on specific manufacturing facilities. Our aggressive utilization of chipscale assembly technologies for our products targeted at limited form factor mobile electronic products has allowed us to gain valuable
manufacturing expertise and a significant installed manufacturing equipment base for chipscale products much earlier than our direct competition. We believe this position gives us a valuable advantage in the market place.





Products





Our
products consist of thin film integrated passive products and semiconductor products and generally range in price from $0.15 to $1.00 per unit, with some specialized or special purpose products priced up to $10.00 per unit. The following table
provides information regarding our representative products and families by application:





Application

Product Name

Typical MarketsI/O Port Protectors

SZ1284, VGA200, PACKBM, CSPEMI20x, CSPEMI30x

Computers, Wireless Handsets, Personal Digital Assistants, Set Top BoxesEMI Filters

RC032A

Computers, Wireless HandsetsLED Submounts

FCDN501, FCDN511, FCDN510, FCDN512

High Brightness LEDESD Protection

PACDN006, PACDN009, CSPESD304

Mobile Phones, Personal Digital Assistants, Computers, Set Top BoxesPower Management

PWR330, CM3102, CM3014, CM3001, CM3002, CM3003

Network Interface Cards, Computers, Wireless HandsetsAmplifiers

AMPM105

Computers




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Application Specific Integrated Passive Products





Our ASIP products are application specific, high volume general customer products. They represent complete solutions to the
electronic problems of termination, filtering, and electrostatic discharge protection that plague many system designers. Most of the systems in our target markets include a core of highly integrated circuits, accompanied by discrete passive
components, and low integration level integrated circuits or discrete semiconductors. We service the need for the integration of these companion components, which in recent years have come to dominate the size and significantly impact the cost of
most systems.





We also offer a variety of precision and non-precision resistors and capacitors as well as
combinations of those elements with and without semiconductor devices. These devices can also be manufactured on a variety of different substrates. We have particular strength in the area of resistor-capacitor filters, a rapidly growing and complex
segment of the integrated passive component business.





Analog Semiconductor Products





We produce CMOS based analog circuits, utilizing feature sizes of 0.8 microns or greater. We have developed and introduced four
semiconductor product families: power management solutions, operational amplifiers, electrostatic discharge protection devices, and combination devices targeted at the multiple functions on the VGA port of computers.





| |  |  | Our power management devices are single chip solutions that implement the power management techniques for PC motherboards, network interface cards, and mobile
electronics.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Our operational amplifier focus is on providing extremely low power consumption products that are attractive in the computing market. Operational amplifiers are
used in the processing of analog electrical signals. We can integrate multiple operational amplifiers with passive components to provide higher level functions.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Our electrostatic discharge protection devices are typically used to protect connector interfaces and other external elements. These devices are often combined
with signal termination and filtering functions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | We have a family of products for the VGA port on personal computers. These devices combine buffer amplifiers, electrostatic discharge protection, level shifting
functions, and termination and biasing resistors for handling the multiplicity of needs on the video port of computers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Technology Licensing





In fiscal 2001, we announced that we were offering to sell licenses
to third parties to our new patented technology to be marketed under the trademark EZTerm  . This
technology solves transmission line termination problems through the use of a semiconductor-based solution instead of the traditional passive component approach. As a result, it can be designed directly into an Integrated Circuit (IC) without any
special processing or added cost. The Company offers for sale a line of termination products using this technology, under the name PACNLT. The Company has already been issued ten patents in this area.





As of the date of this report we have not sold any licenses for this technology and there is no assurance that we will be able to do so in
the future.




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Customers





Our customers are original equipment manufacturers, contract manufacturers and distributors. In fiscal 2002 approximately 54% of our revenues came from the sale of our products to distributors and 46%
of our revenues came from the sale of our products directly to original equipment manufacturers and contract manufacturers. In fiscal 2002, a distributor, Epco Technology Co., represented 14% of revenues and one original equipment manufacturer,
Guidant Corporation, represented 11% of our revenues. In fiscal 2001, 52% of our revenues came from the sale of our products through distributors, and no single distributor accounted for greater than 10% of net sales. In fiscal 2000, distributors
Arrow Electronics, Inc. and Excelpoint Systems accounted for approximately 17% and 14% of net product sales, respectively. The following were our major end user customers for fiscal 2002 and the markets served by our customers with products into
which our devices are incorporated:





ACER Group

Personal Computers, Wireless HandsetsAgilent Technologies

Optical Components and Test and Measurement EquipmentCelestica, Inc.

Contract ManufacturingCompaq Computer

Computers, PDAsCisco Systems

NetworksDell Computer

ComputersGuidant Corporation

Medical DevicesIntel Corporation

ComputersITI Limited

Telephone SwitchingKyocera Wireless

Wireless HandsetsLumileds

High Brightness LEDsMotorola

Mobile PhonesNortel Networks

Networks and InfrastructureSamsung Electronics Co. Ltd.

Wireless Handsets, ComputersSolectron Corporation

Contract Manufacturing3 COM Corporation

Networks





Sales and Marketing





We focus our marketing efforts on three high growth electronics markets: mobile electronics, computing and LED lighting. The communications infrastructure has historically
been significant, but is not expected to provide a major contribution to our growth in the future.





In the mobile
electronics market, our products provide critical signal integrity, EMI filtering, ESD protection and power management solutions for wireless handsets, PDAs and other portable electronic devices. Our unique design architecture, involving the
integration of thin film and CMOS processes on a single wafer, permits a high level of functional integration in our ASIP products. This, combined with our chipscale packaging technology, permits us to develop and market products for mobile
applications offering significant value to our customer including the advantages of small size, light weight, reduced power consumption and lower system cost.





In the computing market, our products provide signal termination, ESD protection, EMI filtering and voltage regulation solutions for desktop and notebook PCs and peripherals, game consoles, and set-top
boxes. The integration of our products offers customers significant value and provides benefits such as the reduction of bill-of-material part count, increased procurement efficiencies, improved inventory management, increased manufacturing
throughput and increased reliability which all equate to a lower cost of ownership for the application.





In the
LED lighting market, our products include silicon substrates for high brightness LEDs. These substrates provide ESD protection, improved thermal resistance and are coated with an aluminized surface to




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improve the forward transmission of light from the LED. LED lighting applications include: LEDs for LCD display backlights; automotive headlamps and interior lighting; large area electronic signs
and traffic lights. We do not produce the LEDs, but supply mounting substrates to manufacturers and assemblers of LEDs.





Other markets we serve include ASIP products in die form for cardiac pacemakers and defibrillators and ASIPs for communications infrastructure applications.





We concentrate our efforts on major worldwide electronic system manufacturers who are considered market leaders in these segments, and where we feel we have the greatest
opportunities and ability to influence the industry at large. This often involves a longer design-in cycle, but we believe it has greater long-term business potential.





Our products are primarily specified through contact with customers engineering departments, as well as their procurement and manufacturing personnel. Most of the
systems into which our products are designed have short life cycles. As a result, we require a significant number of new design wins on an ongoing basis to maintain and grow revenue.





We work with existing and potential customers to identify passive and semiconductor component needs that our capabilities address, and seek to have customers design our
solutions into their products. We target high volume, application specific, general customer products. In this respect, our business style is closer to that of a semiconductor company, than that of the traditional passive component company.





Our sales channels consist of a small direct sales force and a larger network of independent regional sales
representatives managed by our sales force, with its headquarters in Milpitas, California and regional sales offices throughout the United States, Europe, and Asia. Major mobile electronics customers are primarily buying our devices direct.
Additionally, our LED lighting business is primarily conducted through a direct channel as well. We also sell through distributors in the United States, Asia and Europe.





There is a distinct shift from original equipment manufacturing towards the use of contract manufacturing within our customer base, and we believe that this trend will
continue. Since the end of fiscal 1998 and continuing through fiscal 2002, a contract manufacturer has been one of our largest direct purchasers of product.





Foreign sales accounted for 60%, 48%, and 43% of product sales for fiscal years ended March 31, 2002, 2001, and 2000, respectively. Many of those products were designed into United States based
original equipment manufacturers and subcontracted through overseas assemblers. We use independent foreign sales representatives and distributors to provide international sales support, along with our employees based abroad. We expect that
international sales will continue to represent a significant portion of our sales for the foreseeable future. Our sales are denominated in U.S. dollars.





Manufacturing





Our manufacturing processes are complex, and require production in a highly
controlled, clean environment suitable for fine tolerances. We currently operate wafer fabrication facilities in Milpitas, California and Tempe, Arizona that are ISO 9001 and 9002 certified, respectively. The leased Milpitas facility includes a
10,000 square foot clean room and primarily uses four and five inch round and 41/2inch square wafers to
manufacture thin film passive components. We are re-locating our Milpitas facility during the first half of fiscal 2003 and our new smaller facility will only house selected high value back-end manufacturing activities. We are completing the
consolidation of our internal wafer fabrication in our owned Tempe facility, which includes a 16,000 square foot clean room and is equipped for five-inch wafer fabrication of both thin film passive components and semiconductor products. In fiscal
2002, we implemented a plan to outsource a significant portion of our wafer fabrication activities to third party independent foundry partners. Our first foundry partner, ASMC, is currently running several of our processes and manufacturing various
of our products in material volumes. Our goal is to




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partner with other foundries in Asia in the future and to outsource an increasing amount of our manufacturing so that most of our products are manufactured by our foundry partners.





We manufacture our products using industry standard semiconductor wafer fabrication, testing and packaging equipment that we
modify as necessary. We have historically purchased used processing equipment at significantly lower cost than new equipment, but have also purchased new equipment when it could be shown to be more cost effective or where used equipment was not
available.





Research and Development





Our research and development programs consist primarily of developing new products and processes in response to identified market needs. Additionally, we redesign existing products to reduce costs and
expand their capabilities and performance. In fiscal 2002, we established a design center in Austin, Texas. On March 31, 2002, we had 17 engineers in our research and development department and process development and improvement organizations.





For the fiscal years ended March 31, 2002, 2001 and 2000, we spent $3.9 million, $3.4 million, and
$3.4 million, respectively, on research and development activities.





Intellectual Property





We have been granted approximately 26 U.S. and 3 foreign patents related to our thin film and semiconductor technologies. We have also
established domestic and international trademarks for our ASIP, Signal Integrity Guardian (SIG) and Pico Guard family of devices.





We have acquired a non-exclusive, non-assignable license with respect to manufacturing flip chip, or bumped die, from Flip Chip Technologies, a division of Kulicke and Soffa. Under the terms of this license, we can
utilize certain of Flip Chips Ultra CSP technologies.





Our policy is to apply for patent protection for our
unique products and manufacturing processes where such protection is warranted. Process technologies are more often designated as trade secrets. With respect to mask works, our policy is to selectively register and then also to rely upon copyright
protection. We protect our trade secrets by having our employees sign confidentiality and non-disclosure agreements as part of our personnel policy. It is not our intention to rely solely on protection of intellectual property rights to deter
competition. However, when and where appropriate, we have taken aggressive action to protect our intellectual property rights.





Competition





Competition is based on a number of factors, including price, product
performance, solution form factor, time to market, established customer relationships, manufacturing capabilities, product development and customer support. We face different competitors in each of the core markets we serve. Within the ASIP product
families for the computing and mobile electronics markets, we compete with some ASIP-like devices from Bourns, Semtech, STMicroelectronics N.V., Protek and Philips Electronics N.V. Ltd., however, often we are still competing with traditional
solutions of discrete passive devices. In the semiconductor area, our competitors include On Semiconductor, Fairchild Semiconductor, Linear Technology, Maxim, Micrel, Semtech, STMicroelectronics N.V., National Semiconductor and Texas Instruments.





Backlog





At March 31, 2002 and 2001, our backlog amounted to $7.3 million and $8.6 million, respectively. Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular point




10




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in time is not necessarily indicative of actual sales for any succeeding period. A reduction of backlog during any particular period, or the failure of our backlog to result in future revenue,
could harm our business.





Environmental





We are subject to a variety of federal, state and local regulations in connection with the discharge and storage of certain chemicals during our manufacturing processes. We believe that we are in
compliance with all such environmental regulations. Industrial waste generated at our facilities is either processed prior to discharge or stored in barrels with double containment methods until removed by an independent contractor. We have obtained
all necessary permits for such discharges and storage.





Employees





As of March 31, 2002, we had 234 full-time and part-time employees, including 26 in sales and marketing, 17 in engineering and research and development activities and
in-process development and improvement organizations, 175 in manufacturing, and 16 in administration. As part of our restructuring program, we have notified an additional approximately 47 employees that they will be laid off, mostly during the first
six months of fiscal 2003. None of our employees is subject to a collective bargaining agreement. We consider our relations with our employees to be good.




11




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RISK FACTORS





You should carefully consider the following risks as well as the other information contained in this Form 10-K. If any of the following risks actually occur, our business could be harmed and the
trading price of our common stock could decline.





We incurred quarterly losses beginning with the quarter ended March 31, 2001,
and we may be unable to ever become profitable or sustain profitability.





We have experienced losses for each
quarter beginning with the quarter ended March 31, 2001. For fiscal 2002, our net loss was $28.6 million. Previously, we were also unprofitable from June 30, 1998 through September 30, 1999, although we achieved profitability for the five quarters
beginning with the quarter ended December 31, 2000. We cannot assure you that we will be able to achieve future revenue levels that would result in profitability. Our accumulated deficit at March 31, 2002 was $60.0 million.





Unless we reduce our cash usage below its level of the past few quarters or raise additional cash, we will have to cut our expenses to the detriment of our
business.





Our cash position as of March 31, 2002, was approximately $7.2 million, primarily resulting from
our raising approximately $7.6 million during December 2001. For the quarter ended March 31, 2002, our cash utilization was approximately $3 million. Assuming that this trend continues, and absent a change in our business, we would run out of cash
during fiscal 2003. We have been restructuring our business, both within sales and marketing to better focus on the business we wish to obtain and within manufacturing to transition to a fab lite model by outsourcing much of our
manufacturing. We have taken these steps to reduce the revenues we need to achieve operating cash flow break-even and at the same time to increase our revenues. While we believe that these steps will be sufficient to enable us to achieve operating
cash flow break-even, there can be no assurance that we will be successful in these regards or when we will be successful. If we are not successful in the next quarter or two, then we may have to cut expenses in order to conserve our cash or raise
additional financing, of which there can be no assurance of success. Even if we are successful in reducing our cash usage, we may raise additional equity financing in order to provide ourselves with a cash cushion and funds to expand operations.





We have been in violation of certain of our bank covenants in recent quarters, including the quarter ended March
31, 2002. Although the bank has waived such violations in the past, the bank did not do so for the quarter ended March 31, 2002. We entered into a lending agreement with a new bank in June 2002 to provide up to $5.0 million of equipment and
working capital financing and plan to use the proceeds from this lending agreement to repay our prior bank debt in full. Our new credit facility has covenants and restrictions that we anticipate being able to satisfy, although no assurance can be
given as to our ability to comply with such covenants. Our failure to meet such covenants and a decision of the bank not to waive any such failure could be accompanied by the banks decision not to lend us additional monies or to call our
loans, which could cause us to be in a tight cash situation.





Our operating results may fluctuate significantly because of a number of factors, many of which are beyond our control.





Our operating results may fluctuate significantly. Some of the factors that affect our quarterly and annual operating results, many of which are difficult to control or predict, are:





| |  |  | the reduction, rescheduling or cancellation of orders by customers;
| | - |  | -------------------------------------------------------------------




| |  |  | fluctuations in the timing and amount of customer requests for product shipments;
| | - |  | ---------------------------------------------------------------------------------




| |  |  | many of our orders are quick-turns so that we have no visibility or ability to space manufacturing evenly;
| | - |  | ----------------------------------------------------------------------------------------------------------



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| |  |  | fluctuations in the manufacturing output, yields, and inventory levels of our suppliers;
| | - |  | ----------------------------------------------------------------------------------------




| |  |  | changes in the mix of products that our customers purchase;
| | - |  | -----------------------------------------------------------




| |  |  | our ability to manage distributor inventory to avoid excess returns;
| | - |  | --------------------------------------------------------------------




| |  |  | our ability to introduce new products on a timely basis;
| | - |  | --------------------------------------------------------




| |  |  | the announcement or introduction of products by our competitors;
| | - |  | ----------------------------------------------------------------




| |  |  | the availability of third-party wafer fabrication and assembly capacity and raw materials;
| | - |  | ------------------------------------------------------------------------------------------




| |  |  | competitive pressures on selling prices;
| | - |  | ----------------------------------------




| |  |  | market acceptance of our products;
| | - |  | ----------------------------------




| |  |  | general conditions in the mobile electronics, computing, LED lighting and other markets and industries; and
| | - |  | -----------------------------------------------------------------------------------------------------------




| |  |  | general economic conditions.
| | - |  | ----------------------------




Our markets are subject to rapid technological change. Therefore, our success depends on our ability to develop and introduce new products.





The markets for our products are characterized by:





| |  |  | rapidly changing technologies;
| | - |  | ------------------------------




| |  |  | changing customer needs;
| | - |  | ------------------------




| |  |  | frequent new product introductions and enhancements;
| | - |  | ----------------------------------------------------




| |  |  | increased integration with other functions; and
| | - |  | -----------------------------------------------




| |  |  | rapid product obsolescence.
| | - |  | ---------------------------




To develop new products for our target markets, we must develop, gain access to, and use leading technologies in a cost-effective and timely manner, and continue to expand our technical and design expertise. In addition, we
must have our products designed into our customers future products and maintain close working relationships with key customers in order to develop new products that meet their changing needs.





In addition, products for some applications are based on new and continually evolving industry standards. Our ability to compete will
depend on our ability to identify and ensure compliance with these industry standards. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with
relevant standards.





We may not be able to identify new product opportunities, successfully develop and bring to
market new products, achieve design wins or respond effectively to new technological changes or product announcements by our competitors. In addition, we may not be successful in developing or using new technologies or in developing new products or
product enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense and involve engineering risk. Failure in any of these areas could harm our operating results.





Our future success depends in part on the continued service of our key engineering and management personnel and our ability to identify, hire and
retain additional personnel.





There is intense competition for qualified personnel in the semiconductor
industry, in particular for the highly skilled design, applications and test engineers involved in the development of new analog integrated circuits. Competition is especially intense in the San Francisco Bay area, where our corporate headquarters
is




13




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located, as well as in the Tempe, Arizona area, where our factory is located. We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the
development of our business or to replace engineers or other qualified personnel who may leave our employ in the future. Any growth is expected to place increased demands on our resources and will likely require the addition management and
engineering personnel, and the development of additional expertise by existing management personnel. During fiscal 2002, we hired a CEO, CFO and Vice Presidents of Sales and Marketing, all of whom are critical to our success along with our
continuing Vice Presidents of Engineering and Operations. Loss of the services of these top management team members or our key engineers, or failure to recruit or retain other key technical and management personnel, could harm our business.





The cyclicality of the semiconductor industry could result in pricing pressures for our products that could lower our net sales and
operating margins and harm our profitability.





We are dependent on the semiconductor industry. The
semiconductor industry in general has historically experienced significant downturns and wide fluctuations in supply and demand. The industry has also experienced significant fluctuations in anticipation of changes in general economic conditions.
This has caused significant variances in product demand, production capacity and rapid erosion of average selling prices. Industry-wide fluctuations in the future could result in pricing pressure on our products and lower demand for our products
that could harm our operating margins and net sales.





We are outsourcing an increasing portion of our wafer fabrication and are
seeking additional foundry capacity. We may encounter difficulties in expanding our outsourcing of capacity.





We have begun to outsource a portion of our wafer manufacturing overseas in Asia and are seeking additional foundry capacity. As we add foundry capacity, we may encounter difficulties in outsourcing as the third party contract
manufacturers must learn how to run our processes in their facility. As a result, we may experience unexpected delays or technical issues as we increase the portion of our manufacturing that is outsourced. We have taken steps to close down our
Milpitas, California facility and consolidate those operations in Tempe, Arizona and it is possible that we could encounter issues in such consolidation, as well. It would be difficult if not impossible to reverse our consolidation and outsourcing.
If we experience manufacturing difficulties, then we will not have product to sell to our customers.





We do much of our own wafer
fabrication and do not have alternate sources for some of our processes.





We currently operate our own
semiconductor and thin film wafer manufacturing facility in Tempe, Arizona and perform selected back-end manufacturing in our headquarters facility in Milpitas, California. Much of our equipment has been utilized for a long time, and can be subject
to unscheduled downtime. For some of our processes, our Tempe, Arizona facility is our sole source, which means that any disruption would preclude our manufacturing certain products. Other significant risks associated with our wafer manufacturing
include:





| |  |  | the lack of assured wafer supply, chemicals, or other materials, and control over delivery schedules;
| | - |  | -----------------------------------------------------------------------------------------------------




| |  |  | the unavailability of, or delays in the ability to hire and train, sufficient manufacturing personnel;
| | - |  | ------------------------------------------------------------------------------------------------------




| |  |  | the variability in manufacturing yields and productivity; and
| | - |  | -------------------------------------------------------------




| |  |  | the availability of spare parts and maintenance service for aging equipment.
| | - |  | ----------------------------------------------------------------------------




We could experience a substantial delay or interruption in the shipment of our products or an increase in our costs due to many reasons, including:





| |  |  | a sudden, unanticipated demand for our products;
| | - |  | ------------------------------------------------




| |  |  | a manufacturing disruption experienced by our wafer fabrication facility;
| | - |  | -------------------------------------------------------------------------



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| |  |  | errors in fabrication or defects in raw materials;
| | - |  | --------------------------------------------------




| |  |  | the time required, or the inability to identify or qualify alternative manufacturing sources for existing or new products in the case of disruption;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | failure of our suppliers to obtain the raw materials and equipment used in the production of our integrated circuits and integrated passives; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | unavailability of sufficient capacity to expand chipscale production.
| | - |  | ---------------------------------------------------------------------




The markets in which we participate are intensely competitive and our products are not sold pursuant to long-term contracts.





Our target markets are intensely competitive. Our ability to compete successfully in our target markets depends on the following factors:





| |  |  | designing new products that implement new technologies;
| | - |  | -------------------------------------------------------




| |  |  | subcontracting the assembly of new products and delivering them in a timely manner;
| | - |  | -----------------------------------------------------------------------------------




| |  |  | product quality and reliability;
| | - |  | --------------------------------




| |  |  | technical support and service;
| | - |  | ------------------------------




| |  |  | timely product introduction;
| | - |  | ----------------------------




| |  |  | product performance and features;
| | - |  | ---------------------------------




| |  |  | price;
| | - |  | ------




| |  |  | end-user acceptance of our customers products;
| | - |  | -----------------------------------------------




| |  |  | compliance with evolving standards; and
| | - |  | ---------------------------------------




| |  |  | market acceptance of competitors products.
| | - |  | -------------------------------------------




In addition, our competitors or customers may offer new products based on new technologies, industry standards or end-user or customer requirements, including products that have the potential to
replace or provide lower-cost or higher-performance alternatives to our products. The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable. In addition, our competitors
and customers may introduce products that integrate the functions performed by our integrated circuits on a single integrated circuit, or combine our integrated passives onto the integrated circuit, thus eliminating the need for our products.





Generally, our sales are not subject to long-term contracts but rather to short-term releases of customer
purchase orders, most of which are cancelable on relatively short notice. The timing of these releases for production as well as custom design work is not under our control. The percentage of revenues from turns orders (orders booked and shipped in
the same quarter) has ranged from 61% in the quarter ended June 30, 1999 to as low as 19% for the quarter ended March 31, 2001, making our quarterly revenue dependent on short term orders. Because of the short life cycles involved with our
customers products, the order pattern from individual customers can be erratic with inventory accumulation and de-accumulation during phases of the life cycle for our customers products. As a result, we may experience quarterly
fluctuations in revenue and operating results and the risk of inventory write-offs, as well as the inability to fulfill certain of the demand due to having insufficient inventory on hand and at distributors to fill unexpected orders and due to the
lead-time to make product being in excess of the time certain customers will wait for the product.





Because our
markets are highly fragmented, we generally encounter different competitors in our various market areas. Competitors with respect to our integrated passive products include Bourns, IRC, Semtech, Protek, KOA-Speer, Phillips Electronics N.V. Ltd., and
STMicroelectronics, N.V. In the semiconductor area, our




15




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competitors include On Semiconductor, Fairchild Semiconductor, Linear Technology, Maxim, Micrel, Semtech, STMicroelectronics, N.V., National Semiconductor and Texas Instruments. Many of our
competitors are greater than us in size and have larger financial and other resources than we do.





If we are unable to further
penetrate the markets for mobile electronics, personal computers, and LED lighting, or if these markets fail to grow as expected, our revenues could stop growing and may decline.





A significant portion of our revenues in recent periods has been, and is expected to continue to be, derived from sales to manufacturers of mobile electronics, personal
computer, and LED lighting. In order for us to be successful, we must continue to penetrate these markets. Furthermore, if these markets fail to grow as expected, our business could be materially harmed.





We may invest further monies in attempting to commercialize our EZTerm technology but may not realize any return if such commercialization is unsuccessful.





In fiscal 2001, we announced that we were offering to sell licenses to our new patented technology marketed
under the trademark of EZTerm  . This technology solves transmission line termination problems
through the use of a semiconductor-based solution instead of the traditional passive component approach. As a result, it can be designed directly into an Integrated Circuit (IC) without any special processing or added cost. We offer for sale a line
of termination products using this technology, under the name PACNLT. We have already been issued two patents in this area with several additional applications in process. As of the date of this Form 10-K, we have not sold any licenses
for this technology and there is no assurance that we will do so in the future. We may invest further monies as we attempt to commercialize our EZTerm technology; however, there can be no assurance that we will ever generate significant revenues for
our EZTerm technology, whether from licensing the technology or from sale of our own products embodying such technology.





Our dependence on third-party subcontractors to manufacture, assemble and test our products subjects us to a number of risks, including an inadequate supply of products and higher
manufacturing costs.





We depend on independent subcontractors for the manufacture of an increasing number of
our products and for the assembly and most of the testing of all of our products. As a result, we face significant risks including:





| |  |  | reduced control over delivery schedules and quality;
| | - |  | ----------------------------------------------------




| |  |  | longer lead times;
| | - |  | ------------------




| |  |  | the potential lack of adequate capacity during periods of excess industry demand;
| | - |  | ---------------------------------------------------------------------------------




| |  |  | difficulties selecting and integrating new subcontractors;
| | - |  | ----------------------------------------------------------




| |  |  | limited warranties on products supplied to us;
| | - |  | ----------------------------------------------




| |  |  | potential increases in prices due to capacity shortages and other factors; and
| | - |  | ------------------------------------------------------------------------------




| |  |  | potential misappropriation of our intellectual property.
| | - |  | --------------------------------------------------------




If we fail to deliver our products on time or if the costs of our products increase, then our profitability and customer relationships could be harmed.





Our reliance upon foreign suppliers exposes us to risks associated with international operations.





We use manufacturing, assembly and test subcontractors in Asia, primarily in the Peoples Republic of China, Thailand and India, for most
of our products. We intend to continue transferring our testing and shipping operations to foreign subcontractors. Our dependence on these subcontractors involves the following substantial risks:





| |  |  | political and economic instability;
| | - |  | -----------------------------------




| |  |  | potential difficulty in enforcing agreements and recovering damages for their breach;
| | - |  | -------------------------------------------------------------------------------------



16




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| |  |  | disruption to air transportation from Asia; and
| | - |  | -----------------------------------------------




| |  |  | changes in tax laws, tariffs and freight rates.
| | - |  | -----------------------------------------------




These risks may lead to delayed product delivery or increased costs, which would harm our profitability and customer relationships. In addition, we maintain significant inventory of die at our foreign
subcontractors that could be at risk.





We also drop-ship product from these foreign subcontractors to
customers. This has the effect of both saving freight charges and reducing the delivery cycle time. However, it increases our exposure to disruptions in operations not under our direct control and has required us to enhance our computer and
information systems to coordinate this remote activity.





Our current dependence on our foundry partner and one assembly/test
subcontractor and our planned future dependence upon a limited number of such partners and subcontractors exposes us to a risk of manufacturing disruption or uncontrolled price changes.





Due to the volume of our products, we believe it is impractical for us to spread our use of foundry partners and assembly/test subcontractors over more than a few suppliers
without significant increases in our costs. Currently, in addition to our Tempe, Arizona facility, we have only one foundry partner and rely upon two primary assembly/test subcontractors. Several of our products are now sole sourced in either our
Tempe, Arizona facility or at our foundry partner near Shanghai, China. Our plan is to add one or more additional suppliers to reduce our dependence and increase our flexibility, although no assurance can be given that we will be successful.
Furthermore, as to many of our products, due to their low volumes, we may still choose to rely on only one supplier for their manufacture and assembly/test. Although to date we have not experienced any material disruptions with respect to our
suppliers, if the operations of one or more of our suppliers should be disrupted, our business may be adversely impacted as we may be unable to manufacture certain products. In addition, the volatility of the semiconductor industry has occasionally
resulted in shortages of wafer fabrication capacity and assembly/test subcontractor capacity and other disruption of supplies. We may not be able to find sufficient suppliers at a reasonable price or at all if such disruptions occur.





Our reliance on foreign customers could cause fluctuations in our operating results.





International sales accounted for 60% percent of net sales in fiscal 2002, 48% of net sales for fiscal 2001, and 43% for fiscal 2000. International sales may account for an
increasing portion of our revenues, which would subject us to the following risks:





| |  |  | changes in regulatory requirements;
| | - |  | -----------------------------------




| |  |  | tariffs and other barriers;
| | - |  | ---------------------------




| |  |  | timing and availability of export licenses;
| | - |  | -------------------------------------------




| |  |  | political and economic instability;
| | - |  | -----------------------------------




| |  |  | difficulties in accounts receivable collections;
| | - |  | ------------------------------------------------




| |  |  | difficulties in staffing and managing foreign subsidiary and branch operations;
| | - |  | -------------------------------------------------------------------------------




| |  |  | difficulties in managing distributors;
| | - |  | --------------------------------------




| |  |  | difficulties in obtaining governmental approvals for certain products;
| | - |  | ----------------------------------------------------------------------




| |  |  | limited intellectual property protection;
| | - |  | -----------------------------------------




| |  |  | foreign currency exchange fluctuations;
| | - |  | ---------------------------------------



17




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| |  |  | the burden of complying with and the risk of violating a wide variety of complex foreign laws and treaties; and
| | - |  | ---------------------------------------------------------------------------------------------------------------




| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------




In addition, because sales of our products have been denominated to date in United States dollars, increases in the value of the United States dollar could increase the relative price of our products
so that they become more expensive to customers in the local currency of a particular country. Furthermore, because some of our customer purchase orders and agreements are influenced, if not governed, by foreign laws, we may be limited in our
ability to enforce our rights under these agreements and to collect damages, if awarded.





If our distributors or sales representatives
experience financial difficulty or otherwise are unwilling to promote our products, our business could be harmed.





We sell many of our products through distributors and sales representatives. Our distributors and sales representatives could reduce or discontinue sales of our products or may sell our competitors products. They may not devote
the resources necessary to sell our products in the volumes and within the time frames that we expect. In addition, we depend upon the continued viability and financial resources of these distributors and sales representatives, some of which are
small organizations with limited working capital. These distributors and sales representatives, in turn, depend substantially on general economic conditions and conditions within the electronics industry. We believe that our success will continue to
depend upon these distributors and sales representatives. If our distributors and sales representatives experience financial difficulties, or otherwise become unable or unwilling to promote and sell our products, our business could be harmed.





Due to the volatility of demand for our products, our inventory may from time-to-time be in excess of our needs, which could cause
write-downs of our inventory or of our deferred margin on distributor sales.





Generally our products are sold
pursuant to short-term releases of customer purchase orders and some orders must be filled on an expedited basis. In addition, many of our products are specific to individual customers. We typically plan our production and our inventory levels, and
the inventory levels of our distributors, based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. Therefore, we often order materials and at least partially fabricate product in anticipation of
customer requirements. In order to achieve level line loading and efficiencies in manufacturing, we may also order and process materials in advance of anticipated customer demand. Furthermore, in order to timely respond to customer demand, due to
long manufacturing lead times, we may also make or have made product in advance of orders to keep our inventory and we may encourage or at times require our distributors to order and stock product in advance of orders which is subject to their right
to return it to us.





In the last two years, there has been a trend toward vendor-managed inventory among some
large customers. In such situations, we do not recognize either revenue or bookings until such time as the customer withdraws inventory from stock. This imposes the burden upon us of carrying additional inventory that is on customer premises and is
subject in certain instances to return to our premises if not used by the customer.





We value our inventories on a part-by-part basis to appropriately consider excess inventory levels and obsolete inventory based primarily based on forecasted customer demand and on backlog, and to
consider reductions in sales price. Customer demand is highly volatile and is difficult to forecast. Based on this and the fact that many of our products are specific to individual customers, backlog is subject to revisions and cancellations and
anticipated demand is constantly changing, which may result in adjustments to inventory valuations in the future.





Our backlog may not
result in future revenue.





Due to possible customer changes in delivery schedules and cancellations of orders,
our backlog at any particular point in time is not necessarily indicative of actual sales for any succeeding period. A reduction of




18




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backlog during any particular period, or the failure of our backlog to result in future revenue, could harm our business.





A significant portion of our operating expenses is relatively fixed. Therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls.





A significant portion of our operating expenses is relatively fixed, and therefore, we have limited ability to reduce expenses quickly in
response to any revenue shortfalls.





Consequently, our operating results will be harmed if our revenues do not
meet our projections. We may experience revenue shortfalls for the following and other reasons:





| |  |  | significant pricing pressures that occur because of declines in average selling prices over the life of a product;
| | - |  | ------------------------------------------------------------------------------------------------------------------




| |  |  | sudden shortages of raw materials or fabrication, test or assembly capacity constraints that lead our suppliers to allocate available supplies or capacity to
other customers and, in turn, harm our ability to meet our sales obligations; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | reduction, rescheduling, or cancellation of customer orders due to actions of our competitors, a softening of the demand for our customers products, or
other reasons.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




We may, in the future, make acquisitions of other companies that will involve numerous risks. There
is no assurance that we will be able to address these risks successfully without substantial expense, delay or other operational or financial problems.





The risks involved with acquisitions include:





| |  |  | diversion of managements attention;
| | - |  | ------------------------------------




| |  |  | failure to retain key personnel;
| | - |  | --------------------------------




| |  |  | amortization of acquired intangible assets;
| | - |  | -------------------------------------------




| |  |  | customer dissatisfaction or performance problems with an acquired company;
| | - |  | --------------------------------------------------------------------------




| |  |  | the cost associated with acquisitions and the integration of acquired operations; and
| | - |  | -------------------------------------------------------------------------------------




| |  |  | assumption of known or unknown liabilities or other unanticipated events or circumstances.
| | - |  | ------------------------------------------------------------------------------------------




We cannot assure you that we will be able to address these risks successfully without substantial expense, delay or other operational or
financial problems.





We may not be able to protect our intellectual property rights adequately.





Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents,
trademarks, copyrights, mask work registrations, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, the steps we take to protect our proprietary
information may not be adequate to prevent misappropriation of our technology, and our competitors may independently develop technology that is substantially similar or superior to our technology.





More specifically, our pending patent applications or any future applications may not be approved, and any issued patents may not provide
us with competitive advantages and may be challenged by third parties. If challenged, our patents may be found to be invalid or unenforceable, and the patents of others may have an adverse effect on our ability to do business. Furthermore, others
may independently develop similar products or processes, duplicate our products or processes, or design around any patents that may be issued to us.




19




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We could be harmed by litigation involving patents and other intellectual property rights.





As a general matter, the semiconductor and related industries are characterized by substantial litigation
regarding patent and other intellectual property rights. We may be accused of infringing the intellectual property rights of third parties. Furthermore, we may have certain indemnification obligations to customers with respect to the infringement of
third-party intellectual property rights by our products. Infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims may be asserted in the future and such
assertions, if proven to be true, may harm our business.





Any litigation relating to the intellectual property
rights of third parties, whether or not determined in our favor or settled by us, would at a minimum be costly and could divert the efforts and attention of our management and technical personnel. In the event of any adverse ruling in any such
litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party
claiming infringement. A license might not be available on reasonable terms, or at all.





We face intense competition from companies
with significantly greater financial, technical and marketing resources that could adversely affect our ability to increase sales of our products.





We compete with major semiconductor companies such as Bourns, Philips Electronics N.V. Ltd., STMicroelectronics N.V., Linear Technology, Maxim, Micrel, National Semiconductor and Texas Instruments
which have substantially greater financial, technical, marketing, distribution, and other resources than we do and have their own facilities for the production of semiconductor components.





Earthquakes, other natural disasters, and shortages may damage our business.





Some of our suppliers are located near major earthquake faults that have experienced earthquakes in the past. In the event of a major earthquake or other natural disaster near our headquarters, our
operations could be harmed. Similarly, a major earthquake or other natural disaster near one or more of our major suppliers, like the one that occurred in Taiwan in September 1999, could disrupt the operations of those suppliers, which could limit
the supply of our products and harm our business.





Additionally, our facility in Tempe, Arizona is located in a
desert region of the southwestern United States. Disruption of water supplies or other infrastructure support could limit the supply of our products and harm our business.





We have occasionally experienced power interruptions at out Tempe facility and the risks of power shortages in California and Arizona have been reported.





Although we have not experienced any material disruption to our business to date, we cannot assure that if power interruptions
or shortages occur in the future, they will not adversely affect our business.





We have litigation pending against us in which the
opposing parties are seeking multi-million dollar verdicts.





Beside the typical litigation most businesses
face, we have two cases pending in which the amount sought from us by former employees is material to our operations. We believe the probability of losing these cases is small. Although several years old, both cases have been stayed by courts until
fairly recently, and as a result, both cases are early in the discovery phase, making it difficult to assess the probability of the opposing parties or ourselves prevailing with a significant degree of confidence. We have not accrued any liability
associated with these cases; however, should circumstances change or we lose a verdict, we could face a multi-million dollar liability.




20




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Future terrorist activity, or threat of such activity, could adversely impact our business.





The September 11, 2001 attack may have adversely affected the demand for our customers products which
in turn reduced their demand for our products. In addition, terrorist activity interfered with communications and transportation networks which adversely affected us. Future terrorist activity could similarly adversely impact our business.





Our stock price may continue to be volatile and our trading volume may continue to be relatively low and limit liquidity and market
efficiency.





The market price of our common stock has fluctuated significantly to date. In the future, the
market price of our common stock could be subject to significant fluctuations due to general market conditions and in response to quarter-to-quarter variations in:





| |  |  | our anticipated or actual operating results;
| | - |  | --------------------------------------------




| |  |  | announcements or introductions of new products;
| | - |  | -----------------------------------------------




| |  |  | technological innovations or setbacks by us or our competitors;
| | - |  | ---------------------------------------------------------------




| |  |  | conditions in the semiconductor and passive components markets;
| | - |  | ---------------------------------------------------------------




| |  |  | the commencement of litigation;
| | - |  | -------------------------------




| |  |  | changes in estimates of our performance by securities analysts;
| | - |  | ---------------------------------------------------------------




| |  |  | announcements of merger or acquisition transactions; and
| | - |  | --------------------------------------------------------




| |  |  | general economic and market conditions.
| | - |  | ---------------------------------------




In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, particularly semiconductor
companies, that have often been unrelated or disproportionate to the operating performance of the companies. These fluctuations, as well as general economic and market conditions may harm the market price of our common stock. Furthermore, our
trading volume is often small, meaning that a few trades have disproportionate influence on our stock price. In addition, someone seeking to liquidate a sizable position in our stock may have difficulty doing so except over an extended period or
privately at a discount.





Our shareholder rights plan, together with anti-takeover provision of our certificate of incorporation and
of the California General Corporation Law may delay, defer or prevent a change of control.





Our board of
directors recently adopted a shareholder rights plan. In addition, our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions,
including voting rights of those shares without any further vote or action by our shareholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may
be issued in the future, including the preferred shares covered by the shareholder rights plan. The issuance of preferred stock may delay, defer or prevent a change in control. The terms of the preferred stock that might be issued could potentially
make more difficult or expensive our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction. California Corporation law requires an affirmative vote of all
classes of stock voting independently in order to approve a change in control. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders. Further, our shareholders must give written notice delivered to our
executive offices no less than 120 days before the one-year anniversary of the date our proxy statement was released to shareholders in connection with the previous years annual meeting to nominate a candidate for director or present a
proposal to our shareholders at a meeting. These notice requirements could inhibit a takeover by delaying shareholder action. The California Corporation law also restricts business combinations with some shareholders once the shareholder acquires
15% or more of our common stock.




21




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A substantial disbursement of shares from our former Chairman is ongoing that could negatively affect
our stock price.





Our former chairman and CEO, Chan Desaigoudar entered into a settlement agreement with the
class of shareholders who sued him for securities fraud in 1994, which provided for him to surrender approximately 1.0 million of his shares of our stock for distribution to the class. Those shares are in the process of being disbursed to the
individual members of the class. We do not know what effect disbursement of this amount of stock may have on the price of our stock, nor when all of the shares will be disbursed, if they have not already been. The court has also ordered the release
to the former chairman of the 0.5 million shares which had been the subject of a court order; these shares will be available for resale by him shortly along with 0.2 million other shares which he owns.





Our failure to comply with environmental regulations could result in substantial liability to us.





We are subject to a variety of federal, state and local laws, rules and regulations relating to the protection of health and the environment. These include laws, rules
and regulations governing the use, storage, discharge, release, treatment and disposal of hazardous chemicals during and after manufacturing, research and development and sales demonstrations, as well as the maintenance of healthy and
environmentally sound conditions within our facilities. If we fail to comply with present or future regulations, we could be subject to substantial liability for clean up efforts, property damage, personal injury and fines or suspension or cessation
of our operations. Restrictions on our ability to expand or continue to operate our present locations could be imposed upon us or we could be required to acquire costly remediation equipment or incur other significant expenses.





Issuance of new laws or accounting regulations, or re-interpretation of existing laws or regulations, could materially impact our business or
stated results.





From time to time, the government, courts, and financial accounting boards issue new laws or
accounting regulations, or modify or re-interpret existing ones. We cannot guarantee that there will not be future changes in laws, interpretations, or regulations that would affect our financial results or the way in which we present them.
Additionally, changes in the laws or regulations could have adverse effects on hiring and many other aspects of our business that would affect our ability to compete, both nationally and internationally.





ITEM 2.Properties.





We currently lease approximately 40,000 square feet of office, development and manufacturing space, including a 10,000 square foot clean room, in Milpitas, CA, pursuant to an agreement that expires on
June 30, 2002, and provides for a current monthly rent payment of $34,628 plus operating expenses. We also own five acres of land and a 46,000 square foot building in Tempe, AZ which houses a 16,000 square foot clean room, wafer fabrication,
manufacturing, and engineering design center. In addition, we rent office facilities for our domestic and international sales offices. Total rent expense for the year ended March 31, 2002 was $485,000.





In May 2002, we entered into a facility lease agreement for approximately 26,000 square feet of office and light manufacturing space in
Milpitas, CA to be used as our headquarters and for selected back-end manufacturing for a term of 38 months. Total future minimum lease payments over the term of the lease are $1.4 million.





We believe that our existing available facilities are adequate for our current and foreseeable future needs.





We estimate that our wafer fabrication capacity utilization was approximately 22% in Tempe and 18% in Milpitas by the end of the year ended March 31, 2002. As a result of
our decision to outsource a significant portion of our wafer manufacturing and consolidate our internal wafer fabrication activities into our Tempe facility, we do not expect to have significant increases in capacity utilization at our Tempe or new
Milpitas facilities in future periods.




22




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ITEM 3.Legal Proceedings.





We are a party to lawsuits, claims, investigations, and proceedings, including commercial and employment matters, which are being handled
and defended in the ordinary course of business. We are not aware of any pending legal proceedings against us that, individually or in the aggregate, would have a material adverse effect on our business, operating results, or financial condition.
See Note 15 of Notes to Financial Statements.





ITEM 4.Submission of Matters to a Vote of Security
Holders.





Not applicable.




23




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PART II





ITEM 5.Market for the Registrants Common Stock and Related Shareholder Matters.





Our common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol CAMD. The following table shows the high and low closing prices for our common stock
as reported by the Nasdaq Stock Market:





Common StockFiscal 2002

Q1

Q2

Q3

Q4High

$
7.26

$
8.65

$
6.34

$
5.25Low

$
4.15

$
3.04

$
3.46

$
4.35Fiscal 2001

Q1

Q2

Q3

Q4High

$
32.25

$
30.38

$
13.63

$
12.00Low

$
12.75

$
12.69

$
6.50

$
6.44





Certain debt covenants restrict the payment of dividends. No
dividends were paid in fiscal 2002, 2001, or 2000. We expect to continue that policy in the foreseeable future. As of April 30, 2002 there were approximately 972 holders of record of our common shares and a substantially greater number of beneficial
owners.





Equity Compensation Plans





The following table summarizes our equity compensation plans as of March 31, 2002:





Plan Category

(a) Number of securities to be issued upon exercise of
outstanding options, warrants and rights

(b) Weighted average
exercise price of outstanding options, warrants and rights

(c ) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))Equity compensation plans approved bysecurity holders(1)

2,140,071

$
7.11

568,394Equity compensation plans not approvedby security holders(2)

709,250

$
5.72

Total

2,849,321

$
6.77

568.394


---

|(1) |  | Number of securities available for future issuance includes 170,866 shares of common stock available for issuance under our Employee Stock Purchase Plan,
308,847 under our 1995 Employee Stock Option Plan and 88,681 under our 1995 Director Stock Option Plan. See Note 14 of our Notes to Financial Statements for a description of our equity compensation plans.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes options to purchase 650,000 shares of common stock to newly hired executive officers and warrants to purchase 59,250 shares of common stock to the
placement agent in our December 2001 private placement. See Note 14 of our Notes to Financial Statements for a description of our equity compensation plans which do not require the approval of, and have not been approved by, our shareholders.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




ITEM 6.Selected Financial Data.





The following selected financial data set forth below should be read in connection with our financial statements and notes thereto and
Managements Discussion and Analysis of Financial Condition and Results of




24




---

Operations included elsewhere in this Form 10-K. Historical results are not necessarily indicative of future results.





Year Ended March 31,2002


2001

2000

1999


1998(in thousands, except per share data)Statement of Operations Data:Net sales

$
29,944


$
57,534

$
43,763

$
33,617


$
33,043Income (loss) before income taxes

$
(28,605
)(1)

$
2,588

$
275

$
(2,771
)

$
(3,005
)Net income (loss)

$
(28,605
)(1)

$
2,536

$
275

$
(2,771
)

$
(3,005
)Net income (loss) per share:Basic

$
(2.33
)

$
0.23

$
0.03

$
(0.28
)

$
(0.30
)Diluted

$
(2.33
)

$
0.20

$
0.02

$
(0.28
)

$
(0.30
)Balance Sheet Data:Cash, cash equivalents and short-term investments

$
7,240


$
6,597

$
6,559

$
4,933


$
5,590Working capital

$
2,385


$
20,203

$
18,417

$
12,382


$
13,547Total assets

$
28,237


$
44,269

$
39,086

$
33,644


$
35,994Long-term obligations

$
7,578


$
9,480

$
8,135

$
8,422


$
8,159Total shareholders equity

$
7,780


$
27,160

$
22,960

$
19,170


$
21,627


---

|(1) |  | Includes $4.2 million of restructuring and asset impairment charges. See Note 7 of Notes to Financial Statements.
|--- |  | -----------------------------------------------------------------------------------------------------------------




ITEM 7.Managements Discussion and Analysis of Financial Condition and Results of Operations.





In the following discussion, fiscal 2002, 2001, and 2000 refer to the year ended March 31, 2002, 2001, and
2000, respectively.





Overview





California Micro Devices Corporation designs, develops and markets application specific integrated passive devices and complementary analog semiconductors. Our products provide signal integrity,
electromagnetic interference filtering, electrostatic discharge protection, and power management solutions to original equipment manufacturers and contract manufacturers. Through proprietary manufacturing processes, we integrate multiple passive
components onto single chips and enhance their functionality with discrete semiconductor functions. Our products are marketed primarily to customers in the mobile electronics, computing, LED lighting, medical and other industries.





In the second quarter of fiscal 2002, our board of directors approved and we began to implement a program to streamline our
manufacturing operations and focus our business on high volume products and in markets that we have, or believe we can achieve, a leadership position while leveraging our core technology strengths. Key parts of this strategy include the plan to
outsource a significant portion of our wafer manufacturing to independent foundries and to discontinue certain older products.





In connection with outsourcing a significant portion of our wafer manufacturing, we are consolidating all of our internal wafer fabrication activities into our Tempe, AZ facility with selected high-value backend manufacturing
activities continuing at our Milpitas, CA headquarters. In connection with these actions we recorded restructuring and asset impairment charges of $4.2 million in the year ended March 31, 2002, which is reflected in operating expenses as
Special Charges. The restructuring program includes a workforce reduction and lease termination costs.




25




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Results of Operations





Net sales.    Net sales for fiscal 2002 were $29.9 million compared to net sales for fiscal 2001 of $57.5 million, a decrease of $27.6
million, or 48.0%. The largest component of this decrease was in the communications infrastructure market followed by lower sales in the computer market. Net sales in the communications infrastructure market and computer market decreased to $3.8
million and $11.0 million, respectively, in fiscal 2002 from approximately $18.3 million and $22.0 million, respectively, in fiscal 2001. Also contributing to this decrease was our foundry business, in which net sales decreased from $2.7 million in
fiscal 2001 to approximately $0.5 million in fiscal 2002. These declines were partially offset by higher net sales in the mobile and other markets. Net sales from the mobile market almost trebled year over year, with net sales of approximately $0.8
million in fiscal 2001 to net sales of approximately $2.4 million in fiscal 2002. Net sales from the medical market increased approximately $1.6 million or 90.2% from fiscal 2001 to fiscal 2002. Also net sales into a lighting application increased
$2.0 million from fiscal 2001 to fiscal 2002. Units shipped during fiscal 2002 decreased approximately 32.6 million units to 87.1 million units in fiscal 2002 as compared to fiscal 2001.





Net sales for fiscal 2001 were $57.5 million as compared to revenues in fiscal 2000 of $43.8 million, an increase of $13.7 million, or 31.3%. The majority of this increase
was in the computer and communication infrastructure markets. Units shipped increased 46% in fiscal 2001 compared to the year-earlier period.





Gross Margin.    Gross margin is comprised of net sales less costs of sales. Gross margin, as a percentage of revenues, was a negative 27.4% in fiscal 2002 compared to a
positive 31.6% in fiscal 2001 and a positive 32.4% in fiscal 2000. The decrease from fiscal 2001 to fiscal 2002 was in part the result of decreased manufacturing efficiencies on lower production volumes as sales decreased and also the result charges
related to our revised manufacturing strategy. Fiscal 2002 gross margin includes charges of $5.2 million relating to the write-off of discontinued inventory on hand and at distributors in connection with our decision to outsource a significant
portion of our manufacturing. As a result of our decision to outsource a significant portion of our manufacturing activity, our capacity at our Tempe, AZ facility will not be fully utilized. The costs related to this idle capacity are expensed as
incurred. Gross margin, as a percentage of revenues, for fiscal 2001 was only slightly lower than gross margin for fiscal 2000 and was primarily due to the slight increase in the write-off of certain excess inventory quantities in fiscal 2001 as
compared to fiscal 2000.





Research and Development.    Research and development
expenses consist primarily of compensation and related costs for employees, prototypes, masks, and other expenses for the development of process technology, new packages and products. Research and development expenses were $3.9 million in fiscal
2002 and $3.4 million in fiscal 2001 and fiscal 2000. The increase in research and development expenses in fiscal 2002 is primarily the result of costs associated with the start up and operation of a new design center in Austin, Texas,
including rent expense for the new center.





Selling, General and
Administrative.    Selling, general and administrative expenses consist primarily of compensation and related costs for employees, sales commissions, marketing and promotional expenses, and legal and other professional fees.
Selling, general and administrative expenses were $11.5 million in fiscal 2002, $11.4 million in fiscal 2001 and $10.1 million in fiscal 2000. The increase in fiscal 2002 over fiscal 2001 is the result of higher legal and professional fees, almost
entirely offset by lower compensation and sales commissions on lower revenues. The increase from fiscal 2001 over fiscal 2000 is primarily due to increased commissions, increased personnel costs (including the expansion of our presence in Europe and
the Far East), and increased promotional activities.





Special Charges.    During fiscal
2002, we recorded restructuring and other special charges of $4.2 million related to our decision to outsource a significant portion of our wafer manufacturing. In connection with this decision, we will consolidate all of our internal wafer
fabrication activities into our Tempe, AZ facility, with




26




---

selected high-value backend manufacturing activities continuing at our Milpitas, CA headquarters. The $4.2 million of special charges consists of expenses related to a workforce reduction,
write-down of certain manufacturing equipment and lease termination costs.





A summary of the charges is as
follows:





Total Charge

Non-cash Charges

Cash Payments

Restructuring Liability
at March 31, 2002(in thousands)Workforce reduction

$
438

$


$


$
438Impairment of equipment


3,395


3,395





Facilities and other


322





49


273$
4,155

$
3,395

$
49

$
711





Workforce reduction





In connection with the restructuring program, we will reduce our headcount by approximately 62 employees, primarily in the
manufacturing functions and primarily located at our Milpitas, CA facility. Approximately 15 employees had been terminated as of March 31, 2002, with their severance and benefits paid in April 2002, and we expect that the majority of the remaining
employees will be terminated by the end of the second quarter of fiscal 2003.





Impairment of equipment





As part of our restructuring program, we will outsource a significant portion of our wafer fabrication
activities and consolidate most of our internal wafer fabrication activities into our Tempe, AZ facility with selected high-value backend manufacturing activities continuing at our Milpitas, CA headquarters. With the outsourcing of a significant
portion of our wafer fabrication activities, the number and volume of products generated from the equipment located at our Tempe facility will be significantly reduced. As a result of these circumstances, we performed an analysis to determine if the
manufacturing equipment at our Tempe, AZ facility was impaired. Based on the analysis performed, which was based on our estimates of future undiscounted cash flows, we determined that these assets were impaired and wrote-down the value of the assets
to their estimated fair value, resulting in a charge of $3.4 million. Fair value was estimated as the amount for which the assets could be purchased in an arms-length transaction.





Facilities and other





The
restructuring plan calls for us to relocate from our Milpitas facility once all internal wafer fabrication activities have been consolidated into our Tempe, AZ facility. As required by the lease for the Milpitas facility, we are obligated to restore
the Milpitas facility to its pre-lease condition. Accordingly, we recorded $251,000 in estimated renovation costs related to the Milpitas facility.





We expect that the remaining cash expenditures relating to the workforce reduction will be paid in the second and third quarters of fiscal 2003. We expect to complete the implementation of this
restructuring program during the next six months, with the remaining cash expenditures relating to facilities and other expected to be paid no later than the end of the second quarter of fiscal 2003. The restructuring liability is included in
accrued liabilities in the balance sheet.





Interest Expense.    Interest expense was
$940,000, $982,000 and $890,000 in fiscal 2002, 2001 and 2000, respectively. The decrease in interest expense from fiscal 2001 to 2002 is primarily due to the expiration of




27




---

capital leases in fiscal 2002, decreasing interest expense. The increase in interest expense in fiscal 2001 compared to fiscal 2000 primarily reflects financing of a portion of our capital
expenditures during fiscal 2001, which were at a higher level of expenditure than in fiscal 2000.





Interest
(Income) and Other (Income) Expense, Net.    Interest (income) and other (income) expense, net was $(104,000) in fiscal 2002 as compared to $(171,000) in fiscal 2001 and $(419,000) in fiscal 2000. The decrease in fiscal 2002
from fiscal 2001 is primarily the result of lower interest income on lower average investment balances, offset in part by lower other expenses in fiscal 2002, as fiscal 2001 included a $250,000 charge related to the write-off of costs associated
with a cancelled public offering of our common stock. The decrease in fiscal 2001 compared to fiscal 2000 was primarily due to a $250,000 write off of costs associated with a cancelled public offering of our common stock.





Income Taxes.    In fiscal 2002, there was no provision for income taxes due to the net loss incurred for the
period. In fiscal 2001, we recorded a federal and state alternative minimum tax provision of $52,000 after taking into consideration the use of net operating loss carryforwards. We did not incur income tax expense in fiscal 2000 due to the
availability of tax loss carryforwards. As of March 31, 2002, we had federal and state tax loss carryforwards of approximately $56.0 million and $13.0 million, respectively. We have provided a valuation allowance against total deferred tax assets
due to the uncertainties surrounding our ability to generate sufficient taxable income in future periods to realize the tax benefits of the carryforwards. See Note 11 of Notes to Financial Statements.





Recent Accounting Pronouncements





In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141), which addresses financial accounting and
reporting for business combinations. SFAS 141 supersedes APB Opinion No. 16, Business Combinations (APB 16) and amends or supersedes a number of interpretations of APB 16. SFAS 141 requires that (1) all business combinations
be accounted for by a single methodthe purchase method, (2) all intangible assets acquired in a business combination are to be recognized as assets apart from goodwill if they meet one of two criteriathe contractual-legal criterion or
the separability criterion and (3) in addition to the disclosure requirements in APB 16, disclosure of the primary reasons for a business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by
major balance sheet caption. When the amounts of goodwill and intangible assets acquired are significant in relation to the purchase price paid, disclosure of other information about those assets is required, such as the amount of goodwill by
reportable segment and the amount of the purchase price assigned to each major intangible asset class. The provisions of SFAS 141 apply to all business combinations initiated after June 30, 2001.





In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles (SFAS 142). Under SFAS 142,
goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their estimated useful lives. We have not recorded any goodwill or indefinite lived intangible assets prior to March 31, 2002 and accordingly, the adoption of this statement as of April 1, 2002 will not have a material
impact on our financial position, results of operations or cash flow.





In August 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for Impairment or Disposal of Long-Lived Assets. SFAS 144 supercedes Statement of Financial Accounting
Standards No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of and is effective for fiscal years beginning after December 15, 2001. SFAS 144 provides accounting and
reporting standards for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS 144 establishes one accounting model to be




28




---

used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired and resolves significant implementation issues that existed with SFAS 121. We do not
expect that adoption of SFAS 144 will have a material impact on our financial statements.





Critical Accounting Policies and Estimates





The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes. We base our estimates on historical
experience and all known facts and circumstances that we believe are relevant. Actual results may differ materially from our estimates. Our significant accounting policies are described in Note 2 of Notes to Financial Statements. The significant
accounting policies that we believe are critical, either because they relate to financial line items that are key indicators of our financial performance (e.g., revenue) and/or because their application requires significant management judgment, are
described in the following paragraphs.





Management has discussed the development of our critical accounting
estimates with the audit committee of the board of directors and they have reviewed the disclosures of such estimates in this Managements Discussion and Analysis of Financial Condition and Results of
Operations.





Revenue recognition





Our revenue recognition policy is described in Note 2 of Notes to Financial Statements. The aspects of our
revenue recognition policy that involve more significant judgments and estimates include the following:





Collection is reasonably assuredwe assess the probability of collection based on a number of factors, including past transaction history and/or the creditworthiness of the customer. If we determine that collection of a
receivable is not probable, we defer recognition of revenue until the collection becomes probable, which is generally upon receipt of cash.





Deferred gross marginshipments to distributors with rights of return are deferred until the inventory is sold through to the end user. At the time of shipment of product to distributors where
there is the right of return, we record the standard margin in deferred margin on sales to distributors, a component of current liabilities on our balance sheet. Deferred margin represents our estimate of the standard margin on the sale
to distributors. At March 31, 2002, deferred margin on sales to distributors was $1.2 million.





Inventory and
related reserves





Our inventory and related reserves policy is described in Note 2 of Notes to Financial
Statements. The aspects of our inventory and related reserves policy that involve more significant judgments and estimates include the following:





Forecast of customer demandwe provide reserves for estimated excess and obsolete inventory based on a comparison of quantity and cost of inventory on hand to managements forecast of
customer demand for the next 12 months. In forecasting customer demand, we make estimates as to, among other things, the timing of sales, the mix of products sold to customers, the timing of design wins and related volume purchases by new and
existing customers, and the timing of existing customers transition to new products. Because a significant portion of our sales are through distributors and many parts may have small sales volume, the customer demand forecast process is not
inclusive of all parts. Therefore, historical trends may also be used in estimating the excess and obsolete inventory reserves. We review our reserve for excess and obsolete inventory on a quarterly basis considering all known facts and
circumstances and adjust our forecast of customer demand accordingly. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of. In fiscal 2002, we recognized a benefit of approximately
$562,000 relating to the sale or consumption of inventory that had been previously reserved. To the extent that our forecast of customer demand materially differs from actual demand, our estimates used in determining cost of sales and gross margin
could be positively or negatively impacted.




29




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Impairment of long-lived assets





Long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that their carrying
value may not be recoverable. An impairment loss is recognized if the sum of the expected undiscounted cash flows from the use of the asset is less than the carrying value of the asset. The amount of impairment loss will be measured as the
difference between the carrying value of the assets and their estimated fair value.





In fiscal 2002, we determined
that the carrying value of certain of our owned manufacturing equipment was no longer recoverable based on estimates of future cash flows. Our estimate of the future cash flows generated from this equipment decreased significantly in 2002 due to the
completion of our plan to outsource a significant portion of our wafer fabrication activities to an independent foundry. As a result, we recognized an impairment charge of approximately $3.4 million in the second quarter of 2002. This equipment has
a post-impairment carrying value of approximately $2.3 million and we anticipate it will continue to be used for the foreseeable future. Estimates of future cash flows used to test the asset for recoverability were based on current operating
projections extended to the useful life of the asset group. We have estimated the fair value of the equipment based on an outside appraisal that relied on market prices for purchases of similar equipment. If the estimate of the cash flows were to
decrease or increase by 10% the assets would still not be recoverable.





Litigation





We are a party to lawsuits, claims, investigations, and proceedings, including commercial and employment matters, which are being handled
and defended in the ordinary course of business. We review the current status of any pending or threatened proceedings with our outside counsel on a regular basis and, considering all the other known relevant facts and circumstances, recognize any
loss that we consider probable and estimable as of the balance sheet date. Because of the potentially significant impact that any possible unfavorable outcome relating to any lawsuits, claims and proceedings, we consider this a critical accounting
estimate. During fiscal 2002, 2001 and 2000, we did not recognize a liability in our balance sheet for any pending threatened litigation, claims, or proceedings.





We have two cases pending in the Santa Clara County, State of California Superior Court in which the amount sought by the plaintiffs is several millions of dollars, and therefore a verdict in their
favor would be materially adverse to our business. Although several years old, both cases have been stayed by courts until fairly recently; and as a result, both cases are early in the discovery phase, making it difficult to assess the probability
of the opposing parties or ourselves prevailing with a significant degree of confidence.





The first case involves
counterclaims brought by our former CEO, Chan Desaigoudar, after we sued him for fraud and breach of fiduciary duty. The counterclaims are for, among other items, wrongful termination and improper termination of his stock option. The second case
involves a former employee, Tarsaim L. Batra, who has sued the company and three of our former officers, Mr. Desaigoudar, Steve Hencke and Surendra Gupta, likewise for wrongful termination of his employment and for deprivation of his stock options.
The U.S. government in the past has prosecuted Messrs. Desaigoudar, Hencke, and Gupta for criminal securities law violations. Mr. Gupta plead guilty before trial while Messrs. Desaigoudar and Hencke were convicted; however, their convictions were
overturned and a retrial was imminent when last month they each entered a guilty plea as to one or more of the counts and are awaiting sentencing.





We believe that we have meritorious defenses to the claims of the opposing parties in both of these cases. Currently, we intend to vigorously pursue our defenses and/or our claims against the opposing
parties in these matters. Should we unexpectedly learn facts during discovery which lead us to reasonably estimate a negative outcome to these cases, or should one or both of these cases result in a verdict for the other parties, then we would
provide for such liability as appropriate.




30




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Liquidity and Capital Resources





We have historically financed our operations through a combination of debt and equity financing and cash generated from operations. Total cash, cash equivalents and
short-term investments as of March 31, 2002 was $7.2 million, as compared to $6.6 million at March 31, 2001. Receivables decreased to $4.6 million at March 31, 2002 compared to $8.1 million a year earlier, primarily as a result of lower sales.
Receivables days sales outstanding were 53 days at March 31, 2002 as compared to 63 days as of March 31, 2001. Inventories decreased from $11.7 million at March 31, 2001 to $2.8 million at March 31, 2002, in part due to the write-off of discontinued
inventory of $4.1 million and to decreased production volumes in response to decreased sales activity. Capital expenditures totaled $2.9 million in fiscal 2002 as compared to $6.7 million in fiscal 2001 reflecting our continued investment in new
equipment to support our production of chipscale products.





Operating activities used $4.4 million of cash in fiscal 2002. The most significant usage of cash was our net loss before non-cash charges of $17.9 million. Increases in long-term assets and decreases in other long-term
liabilities used an additional $121,000 of cash. These uses of cash were partially offset by decreases in accounts receivable, inventories, prepaid expenses and other current assets and increases in accounts payable and deferred margin on
distributor sales, which provided $13.6 million of cash for operations. Cash provided by operating activities in fiscal 2001 of $3.0 million was primarily due to net income of $2.5 million, adjusted for depreciation and amortization and a decrease
in accounts receivable of $3.8 million, which were partially offset by an increase in inventories and decrease in accounts payable and other current liabilities of $3.1 million. Cash used by operating activities in fiscal 2000 of $1.1 million was
primarily due to net income adjusted for depreciation and amortization and an increase in accounts payable and other current liabilities of $5.0 million which was more than offset by increases in accounts receivable and inventories of $6.0 million
and an increase in prepaid expenses and other current assets of $388,000.





We generated cash of $1.1 million from
investing activities for fiscal 2002 as compared to using cash of $5.9 million in fiscal 2001 and $874,000 in fiscal 2000. Cash provided by investing activities in fiscal 2002 was the result of net proceeds from the sale of short-term investments of
$4.0 million, partially offset by cash used to purchase capital equipment.





Net cash provided by financing
activities in fiscal 2002 was $7.9 million and was primarily the result of proceeds from the sale of our common stock of $9.1 million. In fiscal 2002, we sold 2,000,000 shares of our common stock to several institutional investors and certain of our
directors for gross proceeds of $8.2 million, offset by cash offering expenses of $609,000. In addition, we received $1.5 million from the issuance of common stock under our employee benefit plans and $499,000 from long-term borrowings. Repayments
of capital lease obligations and long-term debt of $1.7 million, partially offset these proceeds. Cash provided by financing activities in fiscal 2001 of $3.8 million was the result of borrowings of long-term debt and proceeds from the sale of our
common stock of $4.8 million, offset by repayments on long-term debt and capital lease obligations of $1.0 million. In fiscal 2000, cash provided by financing activities was $2.7 million and resulted from proceeds from the sale of our common stock
of $3.2 million, partially offset by repayments of long-term debt and capital lease obligations.





In June 2002, we
entered into a Loan and Security agreement which allows us to borrow up to a total of $5.0 million under an equipment line of credit and a revolving line of credit, each of which cannot individually exceed $3.5 million. The amount available
under the agreement is based on the amount of eligible equipment and accounts receivable. Under this agreement, which includes a subjective acceleration clause, we are subject to certain financial covenants and restrictions and must maintain a
compensating balance of $2.75 million in order to retain the availability of the revolving credit line. Borrowings under the equipment line and the revolving line bear interest at an annual rate of prime plus 3.0% and prime plus 0.75%, respectively.
Principal, in equal installments, and interest are due monthly for a term of 36 months for all borrowings made under the equipment line. Borrowings under the revolving credit line have a term of 12 months, with principal due at maturity and interest
due in monthly installments. Borrowings under both lines are collateralized by substantially all of our assets.




31




---




During fiscal 2000, we entered into two capital equipment financing facilities
aggregating $1.5 million. The terms of these facilities allowed us to borrow at prime plus 0.75%. During fiscal 2000 and 2001, we borrowed the full amounts available under these facilities. At March 31, 2002, no additional funds were available under
these two facilities. At March 31, 2002, $750,000 was due under these facilities. We expect to terminate these facilities and pay off this debt in full with the proceeds to be received under the Loan and Security agreement described above.





In July 2000, we secured an additional $2.0 million equipment financing facility with interest at prime plus
0.5%. During fiscal 2001 we borrowed $997,000 against this $2.0 million facility. At March 31, 2002, $637,000 was due under this facility. We expect to terminate this facility and pay off this debt in full with the proceeds to be received under the
Loan and Security agreement described above.





In fiscal 2002, we entered into a credit agreement allowing us to borrow up to $500,000 at an annual interest rate of prime plus 0.75%, collateralized by our equipment and other assets. In fiscal 2002, we borrowed $499,000 against
this agreement. At March 31, 2002, $399,000 was due under this facility. We expect to terminate this facility and pay off this debt in full with the proceeds to be received under the Loan and Security agreement described
above.





As of March 31, 2002, we were not
in compliance with our financial covenants related to approximately $1.8 million of our outstanding borrowings. Accordingly, the entire balance is classified as current liabilities in our balance sheet at March 31, 2002. We plan to pay off this debt
in full with the proceeds received under the Loan and Security agreement described above. Additionally, as of March 31, 2002, we were not in compliance with the financial covenants related to our industrial revenue bonds. In accordance with the
terms of the industrial revenue bonds, our non-compliance would need to continue for at least four consecutive quarters in order for the industrial revenue bonds to become callable. We believe that we will be in compliance prior to the end of that
period and accordingly, there is no impact on our short-term liquidity due to our non-compliance.





Future
maturities of long-term debt and sinking fund requirements at March 31, 2002 are $1.5 million in fiscal 2003, $1.2 million in fiscal 2004, $505,000 in fiscal 2005, $250,000 in fiscal 2006, $275,000 in fiscal 2007 and $5.6 million thereafter.





We lease certain of our manufacturing facilities and sales offices under non-cancelable operating leases,
expiring from fiscal 2003 to fiscal 2007. Future minimum lease payments under these leases are $171,000 in fiscal 2003, $66,000 in fiscal 2004, $26,000 in fiscal 2005, $27,000 in fiscal 2006 and $7,000 in fiscal 2007. In May 2002, we entered into a
new facility lease for office and light manufacturing space in Milpitas, CA. Total future minimum lease payments over the term of the lease are $1.4 million.





Operating and capital requirements depend on many factors, including the levels at which we maintain revenue, margins, inventory, accounts receivable and operating expenses. In fiscal 2002, we began to
implement a restructuring program aimed at streamlining our manufacturing operations, bringing our costs more in line with the current revenue levels and restoring profitability. If we were not to adjust our operations and instead use the same
amount of cash in our business operations in fiscal 2003 as we did in fiscal 2002, we would run out of cash.





Our
operating plan for fiscal 2003 forecasts revenue growth and profit improvement, due in part to our focused sales and marketing efforts and in part to gross margin improvement and expense reductions resulting from our manufacturing outsourcing.
Should we achieve that plan, we will require additional equipment financing which we may not be able to obtain on terms we consider reasonable and we may wish to raise additional equity capital to provide us with cash reserves and to fund future
growth. If we do not achieve the operating plan, we will need to further adjust our operations in order to conserve our cash, which will be used to fund operating losses instead of growth. In such event, we may also need to raise additional equity
capital, although such funds may not be available on favorable terms, if at all.




32




---




Regardless of whether we achieve our operating plan, to the extent that existing
cash, cash equivalent and short-term investment balances are not sufficient to support our activities, we will need to raise additional funds through public or private equity or debt financing in order to sustain our operations at the level we
desire. The funds may not be available to us, or if available, we may not be able to obtain them on terms favorable to us.





ITEM
7A.Quantitative and Qualitative Disclosures About Market Risk.





We own financial instruments that are sensitive to market risks as part of our investment portfolio. The investment portfolio is used to preserve our cash until it is required to fund operations and capital investments. None of these
market-risk sensitive instruments are held for trading purposes except for amounts related to our non-qualified deferred compensation program. We do not own derivative financial instruments in our investment portfolio. The investment portfolio
contains instruments that are subject to fluctuation in interest rates.





Our investment portfolio includes debt
instruments that are primarily United Stated Treasury and municipal bonds, high-grade corporate bonds, and money market funds of less than one year in duration. These investments are subject to interest rate risk, and could decline in value if
interest rates increase. Our investment portfolio also consists of certain commercial paper that is also subject to interest rate risk. Due to the short duration and conservative nature of these instruments, we do not believe that we have a material
exposure to interest rate risk.





The interest rates on nearly all of our long-term debt are fixed and therefore
not subject to interest rate fluctuations. See Note 9 of Notes to Financial Statements.





ITEM
8.Financial Statements and Supplementary Data.





Index to Financial
Statements and Schedules





Page NumberFinancial Statements:Report of Ernst & Young LLP, Independent Auditors

34Balance Sheets

35March 31, 2002 and March
31, 2001Statements of Operations

36Years ended March 31,
2002, March 31, 2001, and March 31, 2000Statements of Shareholders Equity

37Years ended March 31,
2002, March 31, 2001, and March 31, 2000Statements of Cash Flows

38Years ended March 31,
2002, March 31, 2001, and March 31, 2000Notes to Financial Statements

39Financial Statement Schedule:Schedule
2                 Valuation and Qualifying Accounts

61




33




---

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS





The Board of Directors and Shareholders


California Micro Devices Corporation





We have audited the accompanying balance sheets of California Micro Devices Corporation as of March 31, 2002 and 2001, and the related
statements of operations, shareholders equity, and cash flows for each of the three years in the period ended March 31, 2002. Our audits also included the financial statement schedule listed in the index at Item 8. These financial statements
and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.





We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of
California Micro Devices Corporation at March 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2002 in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.





/s/    ERNST & YOUNG LLP





San Jose, California


April 29, 2002




34




---




CALIFORNIA MICRO DEVICES CORPORATION





BALANCE SHEETS


(amounts in thousands, except share
data)





March 31, 2002


March 31, 2001ASSETS:Current assets:Cash and cash equivalents

$
6,940


$
2,309Short-term investments


300



4,288Accounts receivable, less allowance fordoubtful accounts of $161 and $279


4,561



8,068Inventories


2,784



11,716Prepaids and other current assets


679



1,451Total current assets


15,264



27,832Property, plant & equipment, net


10,853



14,372Restricted cash


888



914Other long term assets


1,232



1,151Total assets

$
28,237


$
44,269LIABILITIES & SHAREHOLDERS EQUITY:Current liabilities:Accounts payable

$
5,085


$
3,471Accrued liabilities


3,852



1,792Accrued underwriter fees


493



Deferred margin on sales to distributors


1,193



772Current maturities of long-term debt and capital lease obligations


2,256



1,594Total current liabilities


12,879



7,629Long-term debt and capital lease, less current maturities


7,069



8,947Other long-term liabilities


509



533Total liabilities


20,457



17,109Commitments and contingenciesShareholders equity:Preferred stockno par value; 10,000,000 shares authorized;none issued and outstanding






Common stockno par value; 25,000,000 shares authorized;shares issued and outstanding: 13,850,765 as of March
31, 2002and 11,459,503 as of March 31, 2001


67,732



58,509Accumulated deficit


(59,954
)


(31,349
)Accumulated other comprehensive income


2



Total shareholders equity


7,780



27,160Total liabilities and shareholders equity

$
28,237


$
44,269





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




35




---




CALIFORNIA MICRO DEVICES CORPORATION





STATEMENTS OF OPERATIONS


(amounts in thousands,
except per share data)





Year Ended March 31,2002


2001


2000Net sales

$
29,944


$
57,534


$
43,763Cost and expenses:Cost of sales


38,153



39,366



29,571Research and development


3,884



3,405



3,366Selling, general and administrative


11,521



11,364



10,080Special charges


4,155







Total costs and expenses


57,713



54,135



43,017Operating income (loss)


(27,769
)


3,399



746Interest expense


940



982



890Interest (income) and other (income) expense, net


(104
)


(171
)


(419
)Income (loss) before income taxes


(28,605
)


2,588



275Provision for income taxes






52



Net (loss) income

$
(28,605
)

$
2,536


$
275Net (loss) income per sharebasic

$
(2.33
)

$
0.23


$
0.03Weighted average common shares and share equivalents outstandingbasic


12,272



11,243



10,324Net (loss) income per sharediluted

$
(2.33
)

$
0.20


$
0.02Weighted average common shares and share equivalents outstandingdiluted


12,272



12,384



11,642








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




36




---




CALIFORNIA MICRO DEVICES CORPORATION





STATEMENTS OF SHAREHOLDERS EQUITY


(amounts
in thousands)





Common Stock


Accumulated Deficit


Accumulated Other
Comprehensive Income/(Loss)


TotalShares


AmountBalance at March 31, 1999

10,116


$
53,328


$
(34,160
)

$
2


$
19,170Exercise of stock options

730



2,191











2,191Issuance through employeestock purchase plan

192



960











960Provision for contingent stockaward





357











357Components of comprehensive income:Net income









275







275Unrealized gain onavailable-for-sale securities













7



7Comprehensive income

















282Balance at March 31, 2000

11,038



56,836



(33,885
)


9



22,960Exercise of stock options

359



1,077











1,077Issuance through employeestock purchase plan

73



796











796Repurchases of common stock

(40
)


(315
)










(315
)Stock issued related to contingentstock award

30



115











115Components of comprehensive income:Net income









2,536







2,536Unrealized loss onavailable-for-sale securities













(9
)


(9
)Comprehensive income

















2,527Balance at March 31, 2001

11,460



58,509



(31,349
)






27,160Exercise of stock options

262



845











845Issuance through employeestock purchase plan

129



687











687Issuance of common stock andwarrants in private placement

2,000



7,611











7,611Stock-based compensation





80











80Components of comprehensive loss:Net loss









(28,605
)






(28,605
)Unrealized gain onavailable-for-sale securities













2



2Comprehensive loss

















(28,603
)Balance at March 31, 2002

13,851


$
67,732


$
(59,954
)

$
2


$
7,780





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




37




---




CALIFORNIA MICRO DEVICES CORPORATION





STATEMENTS OF CASH FLOWS


(amounts in thousands)





Year Ended March 31,2002


2001


2000Cash flows from operating activities:Net (loss) income

$
(28,605
)

$
2,536


$
275Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:Non-cash portion of special charges


3,395







Write-off of discontinued inventories, net


3,604







Provision for discontinued inventory at distributors, net


611







Depreciation and amortization


3,026



2,947



2,899Stock based compensation


80



115



357Changes in assets and liabilities:Accounts receivable


3,507



807



(4,404
)Inventories


5,328



(1,722
)


(1,556
)Prepaid expenses and other current assets


772



(471
)


(388
)Accounts payable and other current liabilities


3,556



(1,398
)


1,869Other long term assets


(97
)


(28
)


(384
)Other long term liabilities


(24
)


(82
)


290Deferred margin on distributor sales


421



256



(60
)Net cash (used in) provided by operating activities


(4,426
)


2,960



(1,102
)Cash flows from investing activities:Purchases of short-term investments


(2,285
)


(11,561
)


(3,626
)Sales of short-term investments


6,275



12,334



2,735Capital expenditures


(2,886
)


(6,666
)


(1,981
)Net change in restricted cash


26



(12
)


1,998Net cash provided by (used in) investing activities


1,130



(5,905
)


(874
)Cash flows from financing activities:Repayments of capital lease obligations


(185
)


(411
)


(379
)Repayments of long-term debt


(1,530
)


(614
)


(306
)Borrowings of long-term debt


499



3,231



238Proceeds from private placement of common stock, net


7,611







Proceeds from issuance of common stock


1,532



1,558



3,151Net cash provided by financing activities


7,927



3,764



2,704Net increase in cash and cash equivalents


4,631



819



728Cash and cash equivalents at beginning of period


2,309



1,490



762Cash and cash equivalents at end of period

$
6,940


$
2,309


$
1,490Supplemental disclosures of cash flow information:Interest paid

$
955


$
969


$
890





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




38




---




CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS





1.    THE COMPANY





We design, develop, manufacture and market
application specific integrated passive devices and complementary analog semiconductors. Our products provide signal integrity, electromagnetic interference filtering, electrostatic discharge protection, and power management solutions to original
equipment manufacturers and contract manufacturers. We use our silicon-based thin film materials and semiconductor process technology to integrate multiple passive and active elements onto a single integrated circuit.





Our products are marketed primarily to customers in the mobile electronics, computing, LED lighting, medical and other industries.





2.    SIGNIFICANT ACCOUNTING POLICIES





Basis of Presentation





In the
accompanying financial statements, fiscal 2002, 2001, and 2000 refer to the twelve months ended March 31, 2002, 2001, and 2000, respectively. Certain prior year amounts in the financial statements and notes thereto have been reclassified to conform
to the fiscal 2002 presentation.





Use of Estimates





The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates are based on
historical experience, input from sources outside of the company, and other relevant facts and circumstances. Actual results could differ from those estimates.





Cash and Cash Equivalents





We consider all highly liquid
debt instruments with a maturity date of three months or less at the date of purchase to be cash equivalents. Cash equivalents generally consist of commercial paper and money market funds.





Short-term Investments





We
invest our excess cash in high quality financial instruments. All of our marketable investments, except for investments related to our non-qualified deferred compensation program, are classified as available-for-sale and we view our
available-for-sale portfolio as available for use in current operations. Accordingly, we have classified all investments, except for amounts related to our non-qualified deferred compensation program described in Note 14, as short-term, even though
the stated maturity date may be one year or more past the current balance sheet date.





Available-for-sale
securities are stated at fair market value, with unrealized gains and losses, net of tax, reported as a component of shareholders equity. The cost of securities sold is based upon the specific identification method. Realized gains and losses
and declines in value judged to be other than temporary are included in interest income and other (net).




39




---



CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)







Inventories and Related Reserves





Inventories are stated at the lower of cost, determined on a first-in first-out basis, or
market.





Reserves are provided for excess
and obsolete inventory, which are estimated based on a comparison of the quantity and cost of inventory on hand to managements forecast of customer demand. Customer demand is dependent on many factors and requires us to use significant
judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. Because a significant
portion of our sales are through distributors and many parts may have small sales volume, the customer demand forecast process is not inclusive of all parts. Therefore, historical trends may also be used in estimating the excess and obsolete
inventory reserves. Generally, inventories in excess of twelve months demand are reserved and the related charge is recorded to cost of sales. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise
disposed of, even if in subsequent periods we forecast demand for this product.





Property, Plant and Equipment





Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method
over the shorter of the estimated useful lives of the assets, or the remaining lease term. Estimated useful lives of assets are as follows:





Building

40 yearsMachinery and equipment

3-7 yearsLeasehold improvements

5-7 yearsFurniture and fixtures

7 years





Long-lived assets held and used by us are reviewed for impairment
whenever events or changes in circumstances indicate that their carrying value may not be recoverable. An impairment loss is recognized if the sum of the expected future undiscounted cash flows from the use of the asset over its remaining life is
less than the carrying value of the asset. The amount of impairment loss will be measured as the difference between the carrying value of the assets and their estimated fair values. During fiscal 2002, we recorded an impairment loss of $3.4 million.
See Note 7.





Revenue Recognition





We generally recognize revenue when persuasive evidence of an arrangement exists, delivery or customer acceptance, where applicable, has occurred, the fee is fixed or
determinable, and collection is reasonably assured.





Revenue from product sales to end user customers, or to
distributors that do not receive price concessions and do not have return rights, is recognized upon shipment and title transfer, if we believe collection is reasonably assured. Reserves for sales returns and allowances from end user customers are
estimated primarily based on historical experience and are provided for at the time of shipment.





Revenue from
product sales to distributors with agreements allowing for either price concessions or for product returns is recognized at the time the distributor sells the product to OEMs or other end users. Revenue is not recognized upon shipment since, due to
various forms of price concessions, the sales price is not substantially fixed or determinable at that time. Additionally, these distributors have contractual rights to return products, up to a specified amount for a given period of time. Revenue is
recognized when the distributor sells the product to




40




---



CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)




an end user, at which time the sales price becomes fixed. Pursuant to our agreements with our distributors, custom, older or end-of-life products are sold with no right of return and are not
eligible for price concessions. In these cases, revenue is recognized upon shipment to the distributor.





At the
time of shipment to distributors, we defer the estimated standard margin by recording it in deferred margin on sales to distributors, a component of current liabilities on the balance
sheet.





Other





We expense all research and development and advertising costs as incurred.





Net Income (Loss) Per Share





Basic earnings per common share are computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per common share incorporate the incremental shares
issuable upon the assumed exercise of stock options and other dilutive securities. The following table sets forth the computation of basic and diluted net income (loss) per share:





Year Ended March 31,2002


2001

2000(in thousands, except per share amounts)Basic:Net income (loss)

$
(28,605
)

$
2,536

$
275Weighted average shares


12,272



11,243


10,324Net income (loss) per sharebasic

$
(2.33
)

$
0.23

$
0.03Diluted:Net income (loss)

$
(28,605
)

$
2,536

$
275Weighted average shares


12,272



11,243


10,324Dilutive effect of stock options






1,141


1,31812,272



12,384


11,642Net income (loss) per sharediluted

$
(2.33
)

$
0.20

$
0.02





Options to purchase 2,790,000, 231,000 and 77,000 shares of common
stock outstanding at March 31, 2002, 2001 and 2000, respectively, were not included in the diluted earnings per share computation, as the effect of including such shares would be antidilutive. Warrants to purchase 59,250 shares of common stock
outstanding at March 31, 2002 were not included in the diluted earnings per share computation, as the effect of including such shares would be antidilutive.





Stock-Based Compensation





As allowed under Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based Compensation, we account for our employee stock plans in accordance with the provision of Accounting Principles Boards Opinion No. 25
(APB 25), Accounting for Stock Issued to Employees and have adopted the disclosure provisions of SFAS 123. Stock-based awards to non-employees are accounted for in accordance with SFAS 123 and EITF 96-18 Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Fair value for these awards is




41




---



CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)




calculated using the Black-Scholes option-pricing model, which requires that we estimate the volatility of our stock, an appropriate risk-free interest rate, and our dividend yield. The
calculation of fair value is highly sensitive to the expected life of the stock-based award and the volatility of our stock, both of which we estimate based primarily on historical experience.





Comprehensive Income





Accumulated other comprehensive income presented in the accompanying balance sheets at March 31, 2002 and 2001 consists of the accumulated net unrealized gains on available-for-sale
securities.





Income Taxes





Income taxes have been provided using the liability method in accordance with Financial Accounting Standards
Board (FASB) Statement No. 109, Accounting for Income Taxes (SFAS 109). In accordance with SFAS 109, a deferred tax asset or liability is determined based on the difference between the financial statement and tax
basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. We provide a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more
likely than not that the deferred tax assets will be realized.





Recent Accounting Pronouncements





In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business
Combinations (SFAS 141), which addresses financial accounting and reporting for business combinations. SFAS 141 supersedes APB Opinion No. 16, Business Combinations (APB 16) and amends or supersedes a number
of interpretations of APB 16. SFAS 141 requires that (1) all business combinations be accounted for by a single methodthe purchase method, (2) all intangible assets acquired in a business combination are to be recognized as assets apart from
goodwill if they meet one of two criteriathe contractual-legal criterion or the separability criterion and (3) in addition to the disclosure requirements in APB 16, disclosure of the primary reasons for a business combination and the
allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. When the amounts of goodwill and intangible assets acquired are significant in relation to the purchase price paid, disclosure of
other information about those assets is required, such as the amount of goodwill by reportable segment and the amount of the purchase price assigned to each major intangible asset class. The provisions of SFAS 141 apply to all business combinations
initiated after June 30, 2001.





In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangibles (SFAS 142). Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their estimated useful lives. We have not recorded any goodwill or indefinite lived intangible assets prior to March 31, 2002 and
accordingly, the adoption of this statement as of April 1, 2002 will not have a material impact on our financial position, results of operations or cash flow.





In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS 144 supercedes Statement of Financial Accounting Standards No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of and is
effective for years beginning after December 15, 2001. SFAS 144 provides accounting and reporting standards for the impairment




42




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CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)




of long-lived assets and for long-lived assets to be disposed of. SFAS 144 establishes one accounting model to be used for long-lived assets to be disposed of by sale, whether previously held and
used or newly acquired and resolves significant implementation issues that existed with SFAS 121. We expect that adoption of SFAS 144 will not have a material impact on our financial
statements.





Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) requires that we recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through net income. We adopted SFAS 133 as of April 1, 2001. Because we do not currently hold any derivatives, adoption of SFAS 133 did not have a material impact on our financial statements.





3.    CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES





The following is a summary of cash, cash equivalents and marketable securities at March 31, 2002 and March 31, 2001, respectively:





March 31,2002

2001(in thousands)Cash and cash equivalents:Cash

$
1,615

$
977Money market funds


4,657


379Commercial paper


668


953Total cash and cash equivalents

$
6,940

$
2,309Short-term investments:Commercial paper

$


$
2,022U.S. Treasury and municipal bonds


300


1,766Corporate bonds





500Total short-term investments

$
300

$
4,288





At March 31, 2002, all short-term investments mature in greater
than five years. Gross realized gains and losses on the sales of securities are reported as other income and were not significant for all years presented. Gross unrealized gains and losses on available-for-sale securities at March 31, 2002 and 2001
were not material.





4.    CONCENTRATIONS OF CREDIT RISK





Our financial instruments that expose us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and trade accounts
receivable.





We place our cash, cash equivalents and short-term investments in a variety of substantial financial
institutions and limit the amount of credit exposure through diversification and by investing only in instruments of high-grade government and commercial issuers.





A significant portion of our sales are to customers whose activities are related to computer and computer peripherals, wireless communications, networking, medical, and
consumer electronics industries, including some who are located in foreign countries. We generally extend credit to these customers and, therefore, the aforementioned industries and economic influences of customers geographic locations affect
collection of




43




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CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)




accounts receivable. However, we monitor extensions of credit and require collateral, such as letters of credit, whenever deemed necessary. We maintain a reserve for potentially uncollectible
accounts receivable based on our assessment of collectibility.





5.    CONCENTRATION OF OTHER RISKS





Markets





We market our products into high-technology industries, such as mobile electronics, computing, LED lighting, medical and other markets that are characterized by rapid technological change, intense
competitive pressure, and volatile demand patterns. Most of the systems into which the Companys products are designed have short life cycles. As a result, we require a significant number of new design wins on an ongoing basis to maintain and
grow revenue.





Customers





Generally, our sales are not subject to long-term contracts but rather to short-term releases of customers purchase orders, most of which are cancelable on relatively
short notice. The timing of these releases for production as well as custom design work is in the control of the customer. Because of the short life cycles involved with our customers products, the order pattern from individual customers can
be erratic with significant accumulation and de-accumulation of inventory during phases of the life cycle.





Manufacturing





Our manufacturing processes are complex, and require production in a highly
controlled, clean environment suitable for fine tolerances. Normal manufacturing risks include errors in fabrication processes, defects in raw materials, process changes, as well as other factors that can affect yields.





Subcontractors





In fiscal 2002, we implemented a strategy to outsource the wafer fabrication of a portion of our products to ASMC, an outside foundry, located in China. As a result of this strategy, we will be subject to certain risks
including reduced control over delivery schedules, quality assurance, manufacturing yields and production costs, lack of guaranteed production capacity or product supply and lack of availability of, or delayed access to, key process technologies. We
also use independent subcontractors, primarily in Thailand, for assembly, packaging and test of most of our product. The common industry practice of using independent subcontractors to manufacture, test, package and assemble products is subject to
risks resulting from unfavorable economic conditions, political strife, prolonged work stoppages, natural or man-made disasters, or power shortages in these countries, or other factors, and may adversely affect the ability of our independent
subcontractors to manufacture, test, package and assemble our products.





Liquidity





Cash and short-term investments at March 31, 2002 were $7.2 million. In fiscal 2002, we began to implement a restructuring program aimed
at streamlining our manufacturing operations, bringing our costs more in line with the current revenue levels and restoring profitability. We believe these actions will reduce our operating costs in the second half of calendar year 2002 and that we
will have sufficient financial resources to fund our operations for at least the next 12 months. However, there can be no assurance that such steps will be successful. If we are not successful, then we may have to cut expenses in order to conserve
our cash or raise additional financing, of which there can be no assurance of success.




44




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CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)







6.    BALANCE SHEET COMPONENTS





March 31,2002


2001(in thousands)Inventories:Raw materials

$
355


$
574Work-in-process


1,602



6,337Finished goods


827



4,805$
2,784


$
11,716Property, plant and equipment:Land

$
137


$
137Building


3,030



3,030Machinery, equipment and tooling


29,785



30,677Leasehold improvements


1,835



1,452Furniture and fixtures


371



37135,158



35,667Less: accumulated depreciation


(24,305
)


(21,295
)$
10,853


$
14,372Accrued liabilities:Accrued salaries and benefits

$
1,224


$
1,135Restructuring accrual


711



Other accrued liabilities


1,917



657$
3,852


$
1,792





7.    RESTRUCTURING AND ASSET IMPAIRMENT





In the second quarter of fiscal 2002, our Board of Directors approved and we began to implement a program to streamline our
manufacturing operations and focus our business on product and markets in which we have, or believe we can achieve, a leadership position while leveraging our core technology strengths. Key parts of this strategy include the plan to outsource a
significant portion of our wafer manufacturing to an independent foundry and to discontinue certain older products.





In connection with outsourcing a significant portion of our wafer manufacturing, we will consolidate all of our internal wafer fabrication activities into our Tempe, AZ facility with selected high-value backend manufacturing
activities continuing at our Milpitas, CA headquarters. In connection with these actions we recorded restructuring and asset impairment charges of $4.2 million in the year ended March 31, 2002, which is reflected in operating expenses as
Special Charges. The restructuring program includes a workforce reduction and lease termination costs.




45




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CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)







A summary of the restructuring and asset impairment charges is as
follows:





Total Charge

Non-cash Charges

Cash Payments

Restructuring Liability
at March 31, 2002(in thousands)Workforce reduction

$
438

$


$


$
438Impairment of equipment


3,395


3,395





Facilities and other


322





49


273$
4,155

$
3,395

$
49

$
711





Workforce reduction





In connection with the restructuring program, we will reduce our headcount by approximately 62 employees, primarily in the manufacturing
functions and primarily located at our Milpitas, CA facility. The workforce reduction resulted in a $438,000 charge relating to severance and fringe benefits. All employees affected by the workforce reduction were informed of the plan in enough
detail so that they could determine their type and amount of benefit. Approximately 15 employees had been terminated as of March 31, 2002, with their severance and benefits paid in April 2002, and we expect that the majority of the remaining
employees will be terminated by the end of the second quarter of fiscal 2003.





Impairment of equipment





As part of our restructuring program, we will outsource a significant portion of our wafer fabrication
activities and consolidate all of our internal wafer fabrication activities into our Tempe, AZ facility with selected high-value backend manufacturing activities continuing at our Milpitas, CA headquarters. With the outsourcing of a significant
portion of our wafer fabrication activities, the number and volume of products generated from the equipment located at our Tempe facility will be significantly reduced. As a result of these circumstances, we performed an analysis to determine if the
manufacturing equipment at our Tempe, AZ facility was impaired. Based on the analysis performed, which was based on our estimates of future undiscounted cash flows, we determined that these assets were impaired and wrote-down the value of the assets
to their estimated fair value, resulting in a charge of $3.4 million. Fair value was estimated as the amount for which the assets could be purchased in an arms-length transaction.





Facilities and other





The
restructuring plan calls for us to relocate from our Milpitas facility once all internal wafer fabrication activities have been consolidated into our Tempe, AZ facility. As required by the lease for the Milpitas facility, we are obligated to restore
the Milpitas facility to its pre-lease condition. Accordingly, we recorded $251,000 in estimated renovation costs related to the Milpitas facility.





We expect that the remaining cash expenditures relating to the workforce reduction will be paid in the second and third quarters of fiscal
2003. The remaining cash expenditures relating to facilities and other are expected to be paid no later than the end of the second quarter of fiscal 2003. The restructuring liability is included in accrued liabilities in the balance sheet. We expect
to complete the implementation of this restructuring program during the next six months.




46




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CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)







In connection with our revised manufacturing strategy, we also
discontinued certain older products and wrote-off the related discontinued manufacturing and distributor inventory. The gross charges related to the write-off of discontinued inventory was $5.2 million.





8.    FAIR VALUE OF FINANCIAL INSTRUMENTS





We have evaluated the estimated fair value of our financial instruments. The amounts reported as cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued
liabilities approximate fair value due to their short-term maturities. The fair values of short-term investments are estimated based on quoted market prices. The fair value for long-term debt at March 31, 2002 approximated carrying value and was
estimated using discounted cash flow analysis based on estimated interest rates for similar types of borrowing arrangements.





9.    LONG-TERM DEBT





Long-term debt consists of the following (amounts
in thousands):





March 31, 2002

March 31, 2001Industrial revenue bonds at 10.5%, due through March 2018

$
6,720

$
6,890Equipment financing facilities due through February 2004


1,786


2,218Equipment financing agreement due through March 2005


819


1,2489,325


10,356Less current maturities


2,256


1,415$
7,069

$
8,941





Our industrial revenue bonds are collateralized by a lien on all of
our land and buildings in Tempe, AZ, and certain equipment acquired with the proceeds of the bonds, and require certain minimum annual sinking fund payments ranging from $170,000 in fiscal 2002 to $780,000 in fiscal 2018. We have the ability to
prepay the 10.5% Industrial Revenue Bond by redeeming all or part of the outstanding principal amounts without penalty. At March 31, 2002 and 2001, cash of $888,000 and $914,000, respectively, were held in sinking fund trust accounts. Of these
amounts, $800,000 is to be used for principal and interest payments in the event of default by the Company, and the balance is used for semi-annual interest and principal payments. As of March 31, 2002, $6,720,000 was outstanding under this
agreement. These bonds are subject to certain financial covenants, including a restriction on the payment of dividends. As of March 31, 2002, we were not in compliance with the financial covenants related to our industrial revenue bonds. In
accordance with the terms of the industrial revenue bonds, our non-compliance would need to continue for at least four consecutive quarters in order for the industrial revenue bonds to become callable. We believe we will be in compliance within the
period allowed. Accordingly, we have not reclassified the long-term portion of this debt of $6.5 million, to short-term on our balance sheet at March 31, 2002.





In fiscal 1999 and 2000, we borrowed $650,000 and $975,000, respectively, under equipment financing agreements. The borrowings bear interest at 9.9% and 9.6% per year, respectively, and principal and
interest payments are due in monthly installments through March 2005. As of March 31, 2002, $819,000 was outstanding under these agreements. There are no financial covenants related to these equipment financing agreements.





We have borrowed $3.0 million under four separate capital equipment financing facilities. Borrowings under three of these agreements bear
interest at prime plus 0.75% (5.5% at March 31, 2002) per year and borrowings under one of the agreements bears interest at prime plus 0.5% (5.25% at March 31, 2002). Principal,




47




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CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)




in equal installments, and interest are due in monthly installments through February 2004. As of March 31, 2002, we were not in compliance with the financial covenants related to these financing
agreements, and as a result, have included the entire amount due under these agreements of $1.8 million as short-term liabilities on our balance sheet.





Future maturities of long-term debt and sinking fund requirements at March 31, 2002 are as follows (amounts in thousands):





2003



$1,5462004



1,1692005



5052006



2502007



275Thereafter



5,580$9,325





Included in the fiscal 2004 requirements of $1.2 million above is
$710,000 that is classified as a current liability on our balance sheet at March 31, 2002 due to our non-compliance with debt covenants.





10.    LEASE COMMITMENTS





Operating Leases





We lease certain manufacturing facilities and sales offices under operating leases expiring from fiscal 2003 to fiscal 2007.
Future minimum lease payments under non-cancelable operating lease agreements having an initial term in excess of one year at March 31, 2002 are as follows:





(in thousands)2003



$1712004



662005



262006



272007



7Thereafter



$297





Rent expense was $485,000, $459,000 and $445,000 in fiscal 2002,
2001 and 2000, respectively. Rent expense was net of sublease income of $176,000 and $148,000 in fiscal 2001 and 2000, respectively. There was no sublease income in fiscal 2002.





Capital Leases





At March 31,
2002, we have no outstanding capital lease obligations. Obligations under capital leases in fiscal 2001 were at interest rates ranging from 7% and 10% and were due in monthly installments. Machinery and equipment with total cost of $1.6 million and
accumulated depreciation of $840,000 at March 31, 2001, were recorded under capital leases.




48




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CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)







11.    INCOME TAXES





The Companys provision for income taxes consists of the following (amounts in thousands):





Year Ended March 31,2002

2001

2000Current:Federal

$


$
51

$
State





1


Provision for Income Taxes

$


$
52

$






A reconciliation of the Companys effective tax rate to the
federal statutory rate is as follows:





Year Ended March 31,2002


2001


2000Federal statutory tax rate

34
%

34
%

34
%Losses with no current benefit

(34
)%

Utilization of loss carryforward




(32
)%

(34
)%Effective income tax rate

0
%

2
%

0
%





Deferred income taxes reflect the tax effects of net operating loss
and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and
liabilities are as follows:





March 31,2002


2001(in thousands)Deferred tax assets:Net operating loss carryforwards

$
20,003


$
10,900Tax credit carryforwards


476



500Inventory reserves


3,932



3,600Other non-deductible accruals and reserves


3,124



600Total deferred tax assets


27,535



15,600Less valuation allowance


(26,884
)


(15,300
)Net deferred tax asset


651



300Deferred tax liabilities:Tax over book depreciation


651



300Total net deferred tax asset

$



$






Statement of Financial Accounting Statement No. 109 provides for
the recognition of deferred tax assets if realization of such assets is more likely than not. Based on the weight of available evidence, the Company has provided a valuation allowance against total deferred tax assets. The Company will continue to
evaluate the ability to realize the deferred tax assets on a quarterly basis. The valuation allowance increased by $11,584,000 during the year ended March 31, 2002 and decreased $1,000,000 during the year ended March 31, 2001. Approximately $3.4
million of the valuation allowance for deferred tax assets relates to stock option deductions, which when recognized will be directly allocated to common stock.




49




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CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)







At March 31, 2002, we had federal and state net operating loss
carryforwards of approximately $56.0 million and $13.0 million, respectively, which expire in the years 2004 through 2022 and federal and state research and development tax credits of approximately $280,000 and $290,000, respectively. The federal
research and development tax credits expire in the years 2008 through 2022, while the state research and development tax credits carry forward indefinitely.





Utilization of the net operating losses and credit carryforwards may be subject to substantial annual limitation due to ownership change provisions of the Internal Revenue Code of 1986 and similar
state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.





12.    INTEREST INCOME AND OTHER, NET





Interest income and other, net,
consists of (amounts in thousands):





Year Ended March
31,2002


2001


2000Interest income

$
244


$
559


$
300Other income (expense)


(140
)


(388
)


119$
104


$
171


$
419





Interest income reflects the amounts earned from investments in
cash equivalents and short-term securities.





13.    CAPITAL STOCK





Common Stock





In December 2001, we sold 2,000,000 shares of our no par value common stock at $4.11 per share, yielding gross cash proceeds of $8.2 million, in a private placement. Cash offering expenses of approximately $609,000 were
offset against the proceeds for net cash proceeds of $7.6 million. In addition to cash expenses, we issued the placement agent warrants to purchase up to 59,250 shares of our common stock at an exercise price of $4.11 per share. The warrants are
immediately exercisable and expire five years from the date of issuance. The fair value of these warrants, estimated using the Black-Scholes model was approximately $187,000 and was recorded to common stock. The issuance of these shares and this
warrant did not require shareholder approval.





Preferred Stock





We have 10,000,000 shares of preferred stock authorized, of which 400,000
is designated Series A Participating Preferred Stock. The Board of Directors has the authority to issued the Preferred Stock and to fix the rights, privileges, preferences and restrictions related to the Preferred Stock. No shares of preferred stock
were outstanding at March 31, 2002 and 2001.





Shareholder Rights Plan





In September 2001, our Board of Directors adopted a shareholder rights plan, pursuant to which one preferred stock purchase right (a
Right) was distributed for each share of common stock held as of October 12, 2001. Each Right, when exercisable, will entitle the holder to purchase from us one one-thousandth of a share of our Series A Participating Preferred Stock at a
price of $50.00 (the Purchase Price).







50




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CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)




The Rights entitle the holder to receive, upon exercise, shares of common stock (and in certain
circumstances, a combination of securities or other assets) having a value of twice the Purchase Price if a person or group acquires beneficial ownership of 15% or more of our outstanding common stock, subject to certain exceptions for existing
shareholders. Additionally, if we are involved in a business combination or sale of 50% or more of our assets or earning power, each Right will entitle the holder to receive, upon exercise, shares of common stock of the acquiring entity having a
value of twice the Purchase Price. Our Board of Directors has the right to cause each Right to be exchanged for common stock or substitute consideration.





We have the right to redeem the Rights at a price of $0.001 per Right in certain circumstances. The Rights expire on September 24,
2011.





14.    EMPLOYEE BENEFIT PLANS AND
STOCK COMPENSATION





401(K) Savings Plan





We maintain a 401(K) Savings Plan covering substantially all of our employees. Under the plan, eligible employees may contribute up to 15% of their base compensation to the
plan with the Company matching at a rate of 50% of the participants contributions up to a maximum of 3% of their base compensation. Participants contributions are fully vested at all times. The Companys contributions vest
incrementally over a two-year period. During fiscal 2002, 2001, and 2000, we expensed $295,000, $305,000, and $278,000, respectively, relating to our contributions under the plan.





Nonqualified Deferred Compensation Plan





In April 1997, we implemented a nonqualified deferred compensation plan for the benefit of eligible employees. This plan is designed to permit certain discretionary employer contributions in excess of the tax limits applicable to the
401(k) plan and to permit employee deferrals in excess of certain tax limits. Company assets earmarked to pay benefits under the plan are held by a rabbi trust. We have classified the diversified assets held by the rabbi trust as trading securities,
and recorded them at fair market value with changes recorded to other income and expense. The assets are classified within other long-term assets on the balance sheet. Changes in the liability related to the rabbi trust account are recorded as
adjustments to compensation expense. In fiscal 2002, we recognized compensation expense of $25,000 as a result of an increase in the market value of the trust assets, with the same amount being recorded as securities gains included in interest
income. In fiscal 2001, we recorded a benefit to compensation expense of $82,000 due to the decrease in the market value of the trust assets, with the same amount being recorded as a loss in other (income) expense. Compensation expense of $151,000
was recognized in fiscal 2000 as a result of increases in the market value of the trust assets, with the same amount being recorded as securities gains included in interest income. Additionally, during fiscal 2002, 2001 and 2000, we expensed zero,
$2,000 and zero, respectively, relating to our contributions under the plan. The balances held by the rabbi trust are classified as long-term liabilities. The balance in this account was $509,000 and $513,000 at March 31, 2002 and 2001,
respectively.





Stock Option Plans





The 1995 Employee Stock Option Plan (1995 Plan) is administered by the compensation committee consisting of not less than two qualified directors. The 1995
Non-Employee Directors Plan (the Directors Plan) is administered by not less than three members of the Board of Directors and the amount of shares granted to the directors on an annual basis are fixed in amount, as approved by the
shareholders.





Under our 1995 Plan, options may be granted to employees and consultants at prices not less than
85% of the fair market value of our common stock on the date of grant for shares issued under a non-qualified stock




51




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CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)




option agreement. Options may also be issued to key employees at prices not less than 100% of the fair market value of our common stock on the date of grant for shares issued under an incentive
stock option agreement. In fiscal 2002, the number of shares authorized for issuance under the 1995 Plan was increased by 500,000 shares bringing the total authorized shares under the 1995 Plan to 3,655,000. At March 31, 2002, 308,847 shares
remained available for future grant.





The Directors Plan provides for a fixed issuance amount to the directors at
prices not less than 100% of the fair market value of the common stock at the time of the grant. In fiscal 2002, the number of shares authorized for issuance under the Directors Plan was increased by 70,000 shares bringing the total authorized
shares under the Directors Plan to 390,000. As March 31, 2002, 88,681 shares remained available for future grant.





Generally, options under the plans become exercisable and vest over varying periods ranging up to four years as specified by the Board of Directors. Option terms do not exceed ten years from the date of the grant and all plans except
the 1981 Employee Incentive Stock Option Plan (the 1981 Plan) expire within 20 years of date of adoption. No options may be granted during any period of suspension or after termination of any plan. Unexercised options expire upon, or
within, three months of termination of employment, depending upon the circumstances surrounding termination.





In
fiscal 2002, our Board of Directors granted options to purchase 650,000 shares of our common stock to three executives outside of the 1995 Plan described above (Non-Plan Options). All Non-Plan Options were granted at exercise prices
equal to the fair market value on the date of grant, have vesting periods of four years and expire in ten years. Our Non-Plan Options did not require the approval of, and were not approved by, our shareholders. The weighted average exercise price of
the Non-Plan Options granted in fiscal 2002 is $5.86 per share.





The following is a summary of stock option
activity and related information, including Non-Plan Options (in thousands, except per share data):





Shareholder Approved Plans

Non-Shareholder Approved Plan

All PlansShares


Weighted Average Exercise Price

Shares

Weighted Average Exercise Price

Shares


Weighted Average Exercise PriceBalance at March 31, 1999

2,478


$
3.58



$


2,478


$
3.58Granted

455


$
5.80



$


455


$
5.80Exercised

(730
)

$
3.00



$


(730
)

$
3.00Canceled

(251
)

$
3.69



$


(251
)

$
3.69Balance at March 31, 2000

1,952


$
4.27



$


1,952


$
4.27Granted

671


$
17.05



$


671


$
17.05Exercised

(370
)

$
3.63



$


(370
)

$
3.63Canceled

(197
)

$
14.64



$


(197
)

$
14.64Balance at March 31, 2001

2,056


$
7.56



$


2,056


$
7.56Granted

730


$
6.87

650

$
5.86

1,380


$
6.40Exercised

(252
)

$
3.36



$


(252
)

$
3.36Canceled

(394
)

$
11.40



$


(394
)

$
11.40Balance at March 31, 2002

2,140


$
7.11

650

$
5.86

2,790


$
6.82




52




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CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)







The following table summarizes information about options outstanding
at March 31, 2002:





Options Outstanding

Options ExercisableRange of Exercise Prices

Shares

Weighted Average Remaining Contractual Life

Weighted Average Exercise Price

Shares

Weighted Average Exercise Price(thousands)

(years)



(thousands)$2.25$2.88

311

4.99

$
2.80

294

$
2.81$2.97$3.50

171

6.49

$
3.22

125

$
3.25$3.93$5.02

485

5.66

$
4.23

285

$
3.93$5.09$6.40

520

8.94

$
6.25

20

$
5.88$6.44$6.70

563

8.69

$
6.59

175

$
6.44$6.81$8.05

293

8.95

$
7.76

31

$
7.37$8.19$12.50

308

7.26

$
10.91

148

$
10.31$15.19$22.56

139

8.31

$
21.29

51

$
21.012,790

7.51

$
6.82

1,129

$
5.68





In September 1999, the Company entered into a stock based incentive
program with a non-employee consultant located in Europe for up to 30,000 shares of restricted Company common stock based upon achievement of certain incentives over an 18-month period. The consultant achieved those incentives in fiscal year 2000
and 2001 and the shares were issued in 2001. In connection with this agreement, the Company recorded a non-cash compensation expense of $115,000 and $357,000 for fiscal 2001 and 2000, respectively.





Stock Option Cancellation and Re-grant Program





In January 2001, the Board of Directors ratified a plan to allow non-officer employees holding options to purchase the Companys common stock to cancel certain stock
option grants in exchange for a commitment that options to purchase the same number of common shares would be granted six months and one day after the cancellation date provided that the participant has not terminated employment prior to such time
(the Cancellation and Re-grant Program). The new options vest ratably over a period of 36 months and are not exercisable during the first year following the grant date. All other terms of options granted under the Cancellation and
Re-grant Program are substantially the same as the cancelled options. Options to purchase 110,500 shares of common stock were cancelled under the Cancellation and Re-grant Program. In August 2001, options to purchase a total of 109,000 shares of
common stock with an exercise price of $6.70 per share were granted in connection with the Cancellation and Re-grant Program.





Employee Stock Purchase Plan





The 1995 Employee Stock Purchase Plan as Amended June 15,
1999, (the Purchase Plan) is available for all full-time employees possessing less than 5% of the Companys common stock on a fully diluted basis. The Purchase Plan provides for the issuance of up to 960,000 shares at 85% of the
fair market value of the common stock at certain defined points in the plan offering periods. Purchase of the shares is made through employees payroll deductions and may not exceed 15% of their total compensation. The Purchase Plan terminates
on February 9, 2005, or earlier at the discretion of the Companys Board of Directors. As of March 31, 2002, 170,866 shares were available for future issuance under the Purchase Plan.




53




---



CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)







The following is a summary of stock purchased under the plan:





Year Ended March 31,2002

2001

2000Aggregate purchase price

$
686,513

$
795,850

$
680,004Shares purchased


129,180


72,767


191,758Employee participants as of March 31


72


123


185





Stock-Based Compensation





We generally recognize no compensation expense with respect to employee stock grants. Had we recognized compensation for the grant date
fair value of employee stock grants in accordance with SFAS 123, our net income (loss) and net (income) loss per share would have been revised to the pro forma amounts below:





Year Ended March 31,2002


2001


2000(in thousands, except per share data)As reported:Net income (loss)

$
(28,605
)

$
2,536


$
275Diluted net income (loss) per share

$
(2.33
)

$
0.20


$
0.02Pro forma:Net income (loss)

$
(34,157
)

$
(528
)

$
(1,143
)Diluted net income (loss) per share

$
(2.78
)

$
(0.04
)

$
(0.10
)





For pro forma purposes, the estimated fair value of our stock-based
grants is amortized over the options vesting period for stock options granted under the 1995 Plan, the Directors Plan and the Non-Plan Option, and the purchase period for stock purchases under the Purchase Plan.





The pro forma net loss is computed using the Black-Scholes option pricing model. The Black-Scholes model was developed for use in
estimating the fair value of traded options that do not have specific vesting schedules and are ordinarily transferable. The Black-Scholes model requires the input of highly subjective assumptions, including the expected stock price volatility and
estimated time until exercise, which can significantly impact the fair value on the grant date. As a result, the pro forma disclosures are not necessarily indicative of pro forma effects on reported financial results for future years.





The fair value of our stock-based grants was estimated assuming no expected dividends and the following weighted-average
assumptions:





Options


Purchase Plan2002


2001


2000


2002


2001


2000Expected life years

3.77


3.18


3.43


0.43


0.43


0.25Volatility

1.05


0.92


1.03


0.86


1.19


1.13Risk-free interest rate

4.21
%

5.79
%

6.13
%

2.91
%

6.37
%

5.06
%





The weighted-average fair value of stock options granted in fiscal
2002, 2001 and 2000 were $4.57, $17.05 and $5.80 per share, respectively. The weighted-average fair value of the option element of the Purchase Plan stock granted in fiscal 2002, 2001 and 2000 was $2.27, $9.91 and $1.39 per share, respectively.







54




---



CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)




15.    LITIGATION





We are a party to lawsuits, claims, investigations, and proceedings, including commercial and employment matters, which are being handled and defended in the ordinary course of business. We review the
current status of any pending or threatened proceedings with our outside counsel on a regular basis and, considering all the other known relevant facts and circumstances, recognize any loss that we consider probable and estimable as of the balance
sheet date. During fiscal 2002, 2001 and 2000, we did not recognize a liability on our balance sheet for any pending threatened litigation, claims, or proceedings.





We have two cases pending in the Santa Clara County, State of California Superior Court in which the amount sought by the plaintiffs is several millions of dollars, and
therefore a verdict in their favor would be materially adverse to our business. Although several years old, both cases have been stayed by courts until fairly recently; as a result, both cases are early in the discovery phase, making it difficult to
assess the probability of the opposing parties or ourselves prevailing with a significant degree of confidence. As a result, we have not made any accrual for these cases.





The first case involves counterclaims brought by our former CEO, Chan Desaigoudar, after we sued him for fraud and breach of fiduciary duty. The counterclaims are for,
among other items, wrongful termination and improper termination of his stock options. The second case involves a former employee, Tarsaim L. Batra, who has sued the company and three of our former officers, Mr. Desaigoudar, Steve Hencke and
Surendra Gupta, likewise for wrongful termination of his employment and for deprivation of his stock options. The U.S. government in the past has prosecuted Messrs. Desaigoudar, Hencke, and Gupta for criminal securities law violations. Mr. Gupta
plead guilty before trial while Messrs. Desaigoudar and Hencke were convicted; however, their convictions were overturned and a retrial was imminent when last month they each entered a guilty plea as to one or more of the counts and are awaiting
sentencing.





We believe that we have meritorious defenses to the claims of the opposing parties in both of these
cases. Currently, we intend to vigorously pursue our defenses and/or our claims against the opposing parties in these matters. Should we unexpectedly learn facts during discovery which lead us to reasonably estimate a negative outcome to these
cases, or should one or both of these cases result in a verdict for the other parties, then we will provide for such liability, as appropriate.





16.    SEGMENT INFORMATION





Our operations are classified into one
reportable segment. Substantially all of our operations and long-lived assets reside in the United States although we have sales operations in Europe, Japan, Hong Kong and Taiwan. In fiscal 2002, one distributor and one original equipment
manufacturer, represented 14% and 11% of net sales, respectively. In fiscal 2001, no single customer accounted for greater than 10% of net sales. In fiscal 2000, two distributors accounted for 17% and 14% of net sales, respectively. In fiscal 2002,
net sales to customers in the United States, Taiwan and Hong Kong were $12.1 million, $6.4 million and $3.4 million, respectively, and accounted for 40%, 21% and 11% of net sales, respectively. In fiscal 2001, net sales to customers in the United
States and Taiwan were $30.1 million and $9.1 million, respectively, and accounted for 52% and 16% of net sales, respectively. In fiscal 2000 net sales to customers in the United States, Singapore and Taiwan were $24.8 million, $4.6 million and $4.3
million, respectively and represented 56.8%, 10.5% and 10% of net sales, respectively. Foreign currency transaction gains and losses are not significant.




55




---



CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)







Net sales to geographic regions reported below are based upon the
customers ship to locations (amounts in thousands):





Year Ended March 31,2002

2001

2000Net product sales to geographic regions:United States

$
12,083

$
30,073

$
24,836Europe


2,100


4,941


3,882Far East and other


15,761


22,520


15,045Net product sales

$
29,944

$
57,534

$
43,763





17.    QUARTERLY FINANCIAL DATA (UNAUDITED)





For the Three Months EndedJun. 30


Sept. 30


Dec. 31


Mar. 31(in thousands, except per share data)Fiscal 2002:Net sales

$
6,105


$
8,638


$
7,045


$
8,156Cost of sales


6,658



8,986



12,676



9,833Operating income (loss)


(4,165
)


(7,948
)(1)


(9,545
)


(6,111
)Net income (loss)


(4,291
)


(8,261
)(1)


(9,707
)


(6,346
)Basic net income (loss) per share


(0.37
)


(0.71
)


(0.79
)


(0.46
)Diluted net income (loss) per share


(0.37
)


(0.71
)


(0.79
)


(0.46
)Fiscal 2001:Net sales

$
14,876


$
16,112


$
14,507


$
12,039Cost of sales


9,600



10,725



9,076



9,965Operating income (loss)


1,660



1,630



1,508



(1,399
)Net income (loss)


1,467



1,225



1,310



(1,466
)Basic net income (loss) per share


0.13



0.11



0.12



(0.13
)Diluted net income (loss) per share


0.12



0.10



0.11



(0.13
)


---

|(1) |  | Includes $4.1 million of restructuring and asset impairment charges.
|--- |  | --------------------------------------------------------------------







18.    SUBSEQUENT EVENTS (UNAUDITED)





Facility Lease





In May 2002, we signed an operating lease
for approximately 26,000 square feet of office and light manufacturing space in Milpitas, CA to be used as our headquarters and for selected back-end manufacturing. The lease term is 38 months. Future non-cancelable minimum lease payments under this
lease are $271,000 in fiscal 2003, $409,000 in fiscal 2004, $472,000 in fiscal 2005 and $214,000 in fiscal 2005.





Financing Agreement





In June 2002, we entered into a Loan and Security Agreement
(Agreement) that allows us to borrow up to a total of $5.0 million under an equipment line of credit and a revolving line of credit. The amount available under the Agreement is based on the amount of eligible equipment and accounts
receivable. Under the Agreement, which includes a subjective acceleration clause, we are subject to certain financial covenants and




56




---



CALIFORNIA MICRO DEVICES CORPORATION





NOTES TO FINANCIAL STATEMENTS(Continued)




restrictions and must maintain a compensating balance of $2.75 million in order to retain the availability of the revolving credit line. Borrowings under the equipment line and the revolving line
will bear interest at an annual rate of prime plus 3.0% and prime plus 0.75%, respectively. Principal, in equal installments, and interest are due monthly for the term of 36 months for all borrowings made under the equipment line. Borrowings under
the revolving credit line will have a term of 12 months, with principal due at maturity and interest due in monthly installments. Borrowings under both lines will be collateralized by substantially all of our assets.





ITEM 9.Disagreements on Accounting and Financial Disclosure.





There were no disagreements with the independent auditors in fiscal 2002, 2001, and 2000.




57




---




PART III





ITEM 10.Directors and Executive Officers of the Registrant.





The information required by this Item is set forth in the 2002 Proxy Statement under the captions Directors and Executive Officers of the Registrant and Executive Compensation
and is incorporated herein by reference.





ITEM 11.Executive Compensation.





The information required by this Item is set forth in the 2002 Proxy Statement under the caption
Executive Compensation and is incorporated herein by reference.





ITEM 12.Security
Ownership of Certain Beneficial Owners and Management.





Information related to security ownership
of certain beneficial owners and security ownership of management is set forth in the 2002 Proxy Statement under the caption Security Ownership of Certain Beneficial Owners and Management and is incorporated herein by reference.





Item 13.Certain Relationships and Related Transactions.





Information related to certain relationships and related transactions is set forth in the 2002 Proxy Statement under the caption
Certain Relationships and Related Transactions and is incorporated herein by reference.




58




---




PART IV





ITEM 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K.





The following documents are filed as a part of this Report:





| | (a) |  | 1.     See Item 8 for a list of financial statements filed herein.
| | --- |  | ------------------------------------------------------------------




| | 2. |  | See Item 8 for a list of financial statement schedules filed. All other schedules have been omitted because they are not applicable or the required information
is shown in the Financial Statements or the notes thereto.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Exhibit Index:
| | -- |  | --------------




The exhibits listed below are filed herewith or incorporated by reference as indicated pursuant to Regulation S-K. The exhibit number refers to number indicated pursuant to the Instructions to the Exhibit Table for
Regulation S-K.





Exhibit Number

Description

Document if Incorporated by Reference3(i)a

Articles of Incorporation, as amended.

Exhibit 3(i) to the Companys Annual Report
on Form 10K for the fiscal year ended March 31, 1995.3(i)b

Certificate of Correction of Certificate of Certificate of Amendment of Articles of Incorporation3(i)c

Certificate of Determination of Series A Participating Preferred Stock

Registration Statement on Form 8-A filed on September 21, 2001.3(ii)

By-laws, as amended.

Exhibit 3(ii) to the Companys Annual Report on Form 10K for the fiscal year ended March 31, 1995 and filed
herewith.4.1

1995 Employee Stock Option, Amended as of July 26, 1996, July 18, 1997, August 7, 1998, August 1, 2000, and August 7, 2001

Registration Statement on Form S-8 filed on May 15, 2002.4.2

1995 Non-Employee Directors Stock Option Plan, Amended as of July 26, 1006, July 18, 1997, August 7, 1998, August 1, 2000, and August 7,
2001.

Registration Statement on Form S-8 filed on May 15, 2002.4.3

Stock Purchase Agreement dated November 21, 2001 between the Company and Investors.

Exhibit 4.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended December 31, 2001 filed on February 14, 2002.4.4

Non-Qualified Stock Option Agreement by and between the Company and David E. Witkowski dated September 7, 2001.

Registration Statement on Form S-8 filed on May 15, 2002.4.5

Non-Qualified Stock Option Agreement by and between the Company and Kenneth E. Thornbrugh dated as of January 24, 2002.

Registration Statement on Form S-8 filed on May 15, 2002.4.6

Offer letter dated March 29, 2001 between the Company and Robert. V. Dickinson, President and CEO of the Company.

Exhibit 1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 filed on August 14, 2001.




59




---

Exhibit Number

Description

Document if Incorporated by Reference4.7

Stock Option Agreement dated April 16, 2001, between the Company and Robert V. Dickinson, President and CEO of the Company.

Exhibit 2 to the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2001 filed on August 14, 2001.10.11

Commitment letter from Comerica Bank.

Exhibit 10.11 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 filed on November 14, 2001.10.12

Wafer Manufacturing Agreement between the Company and Advanced Semiconductor Manufacturing Corporation, dated February 20, 2002. (Confidential treatment has
been requested with respect certain portions of this agreement.10.13

Loan and Security Agreement by and between Silicon Valley Bank and the Company, dated June 17, 2002.23.1

Consent of Ernst & Young, LLP, Independent Auditors





| | (b) |  | 1.     Reports on Form 8-K:
| | --- |  | ---------------------------




On January 7, 2002, we filed a Form 8-K under Item 5, reporting the affirmation of our December 2002 quarter guidance.





On January 23, 2002, we filed a Form 8-K under Item 5, reporting the selection of a new Vice President Finance and
Administration and Chief Financial Officer.





DOCUMENTS INCORPORATED BY REFERENCE





Portions of the Registrants Proxy Statement in connection with its August 7, 2002 Annual Meeting of Shareholders (which will be
filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended March 31, 2002) are incorporated by reference into Part III.




60




---




SCHEDULE 2





CALIFORNIA MICRO DEVICES CORPORATION


VALUATION AND QUALIFYING ACCOUNTS





Years Ended March 31, 2002, 2001, and 2000


(Amounts in Thousands)





Balance at Beginning of Year

Additions Charged to Cost and Expense

Deductions (1)


Balance at End of YearYear ended March 31, 2002 Allowance for doubtful accounts (deducted from accounts receivable)

$
279

$
216

$
(334
)

$
161Year ended March 31, 2001 Allowance for doubtful accounts (deducted from accounts receivable)

$
219

$


$
60


$
279Year ended March 31, 2000 Allowance for doubtful accounts (deducted from accounts receivable)

$
224

$


$
5


$
219


---

|(1) |  | Represents write-offs net of recovery of receivables.
|--- |  | -----------------------------------------------------



61




---




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 on the 24th day of June 2002.





CALIFORNIA MICRO DEVICES CORPORATION (Registrant)By:

/s/    ROBERT V.
DICKINSON Robert V. Dickinson President and Chief Executive 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 indicated on the 24th day of June 2002.





By:





/s/    ROBERT V.
DICKINSON Robert V. Dickinson

President and Chief Executive Officer (Principal Executive Officer)/s/    KENNETH E.
THORNBRUGH Kenneth E. Thornbrugh


Vice President Finance & Administration and Chief Financial Officer (Principal Financial and Accounting Officer)/s/    WADE
MEYERCORD

Chairman of the BoardWade Meyercord/s/    JEFFREY C.
KALB

DirectorJeffrey C. Kalb/s/    J. DANIEL
MCCRANIE

DirectorJ. Daniel McCranie/s/    EDWARD C.
ROSS

DirectorEdward C. Ross/s/    JOHN
SPRAGUE

DirectorJohn Sprague/s/    DONALD
WAITE

DirectorDonald Waite




62