MULTILINK TECHNOLOGY CORP - 10-K Annual Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
		FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

¨		TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
		FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 000-31851

MULTILINK TECHNOLOGY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

CALIFORNIA (State or Other jurisdiction of Incorporation Organization)		95-4522566 (I.R.S. Employer Identification No.)

300 ATRIUM DRIVE, 2nd FLOOR, SOMERSET, NEW JERSEY (Address of Principal Executive Offices)		08873 (Zip Code)

Registrant’s telephone number, including area code: (732) 537-3700

Securities registered pursuant to Section 12(b) of the Act: NONE

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

CLASS A COMMON STOCK, $0.0001 PAR VALUE

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average closing bid and asked prices of such stock, as of March 18, 2002 was approximately $84,120,644. (All officers and directors of the registrant are considered affiliates.)

At March 18, 2002 the registrant had 47,185,391 shares of Class A Common Stock issued and outstanding and 27,000,000 shares of Class B Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for its Annual Meeting of Stockholders to be filed with the Commission within 120 days after the close of its fiscal year are incorporated by reference into Part III.

MULTILINK TECHNOLOGY CORPORATION

FORM 10-K ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2001

TABLE OF CONTENTS

Item		Page

PART I
1.	Business	1
2.	Property	8
3.	Legal Proceedings	8
4.	Submission of Matters to a Vote of Security Holders	8

PART II
5.	Market for Registrant’s Common Equity and Related Stockholder Matters	9
6.	Selected Financial Data	10
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
7A.	Quantitative and Qualitative Disclosures About Market Risk	28
8.	Financial Statements and Supplementary Information	29
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	29

PART III
10.	Directors and Executive Officers of the Registrant	30
11.	Executive Compensation	30
12.	Security Ownership of Certain Beneficial Owners and Management	30
13.	Certain Relationships and Related Transactions	30

PART IV
14.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	31

CAUTIONARY STATEMENT

This Report contains forward-looking statements which include, but are not limited to, statements concerning projected revenues, expenses, gross profit and income, market acceptance of our products, the competitive nature of and anticipated growth in our markets, our ability to achieve further product integration, the status of evolving technologies and their growth potential, the timing of new product introductions, the adoption of future industry standards, our production capacity, our ability to migrate to smaller process geometries, new technologies, and the need for additional capital. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” at the end of Item 7 of this Report. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

As used in this Form 10-K, “company,” “we,” “us,” “our,” “Multilink” and “Multilink Technology” refer to Multilink Technology Corporation and its subsidiary companies. We were incorporated in California in July 1994.

PART I.

Item 1. BUSINESS

We design, develop and market advanced integrated circuits, modules and higher-level assemblies that enable next generation optical networking systems. Our products address the markets for DWDM and SONET/SDH optical networking equipment. We focus exclusively on the fastest commercially available speeds of OC-192, or 10 gigabits per second, or higher and are in the early stages of developing products that are designed to address future systems that may operate at speeds of OC-768, or 40 gigabits per second or higher. We seek to be first to develop innovative products with system functions that allow communications equipment manufacturers to rapidly build and deliver high performance fiber optic systems ahead of their competitors. We work closely with our customers to design and deliver integrated product solutions utilizing our semiconductor, circuit design and systems level expertise. We sell our products to leading and emerging communications equipment manufacturers that develop high-speed optical networking systems. Our customers include Alcatel, Ciena, Cisco, JDS Uniphase, Lucent, Marconi, Nortel, ONI, Sycamore and TyCom.

Background

Dramatic Increase in the Volume of Communications Traffic

The volume of data traffic across communications networks has grown rapidly over the past decade. This growth has been driven by the increased use of data-intensive applications such as electronic commerce, Internet access, e-mail, streaming audio and video, remote access and other new applications. Currently, data traffic exceeds voice traffic in communicating networks, and should be the key driver for growth in the coming years. Current estimates from Telechoice, Inc., a leading market research and consulting firm, are that data traffic will continue to grow between 70% and 120% per year during the next three years driven by web browsing, e-mail, enterprise data networking and other applications. According to International Data Corporation (IDC), a leading market research and consulting firm, the number of internet users worldwide will double in the next three years, and the percentage of those users who have broadband access will increase from under 15% of users to over 25%.

Development of Fiber Optic Networks

Much of the public network’s infrastructure was originally designed to transmit voice communications utilizing copper wire as the primary transmission medium. This copper wire-based infrastructure is ill-suited for high-speed data transmission due to bandwidth limitations and high maintenance and administration costs. The inadequacy of the legacy public network infrastructure is particularly acute in the backbone, or core portion of the network. The core is the portion of the network characterized by long distance transmissions at high-speeds, or bit rates. Communications service providers are upgrading their network architectures by increasing bandwidth and switching capabilities for high-speed data and voice transmissions and are replacing conventional copper wire technology with fiber optic technology. Fiber optics offers substantially greater capacity than copper wire and is less error-prone and, as a result has become the transmission medium of choice for both incumbent and emerging service providers. SONET/SDH, or Synchronous Optical Network/Synchromous Digital Hierarchy, are the standards,

or protocols, for the transmission of communications traffic over optical fiber. SONET and SDH facilitate high data integrity and improve network reliability at the higher transmission rates demanded in newly developed optical networking systems.

Innovations in Optical Networking Systems

The increased demand for bandwidth is driving communications equipment manufacturers to incorporate technologies that increase the capacity of optical networking systems. The two primary approaches for increasing capacity are higher transmission speeds and higher channel density. The majority of new optical networking systems deployed by service providers addressing the network core operate at 10 gigabits per second, or Gb/s. We believe future network deployments will incorporate systems that operate at 40 Gb/s or faster when the technology becomes commercially available. DWDM, or dense wavelength division multiplexing, is a technology development that increases the capacity of existing fiber optic networks by combining multiple light beams of information, each at a different wavelength, or channel, onto a single strand of optical fiber. Higher transmission speeds and increased deployments of DWDM technology have significantly increased the complexity of optical networking systems. In addition, we believe that next generation optical networks will add substantial functionality and innovations to the optical transport layer to further optimize available capacity.

Components for Optical Networking Systems

As communications equipment manufacturers develop systems that enable higher transmission speeds and deploy DWDM technology to increase bandwidth, they must integrate a greater number of complex components that generate, manipulate, transmit and receive electrical and optical signals. These components include integrated circuits, modules and higher-level assemblies and are becoming increasingly important for the manufacture of optical networking systems. These components are viewed as critical to communications equipment manufacturers seeking competitive advantages. The need for communications equipment manufacturers to focus on their core competencies and meet aggressive time-to-market demands for new optical networking systems, along with the complexities associated with the design and development of state-of-the-art components, have caused communications equipment manufacturers to increasingly rely upon sophisticated component suppliers.

Requirements for Supplying Components in Optical Networking Systems

To meet the performance and functionality requirements of optical networking systems, communications equipment manufacturers are seeking suppliers that can deliver increasingly sophisticated component solutions. These component suppliers must provide each of the following:

Systems Level Expertise. Component suppliers must understand the performance, functionality and integration requirements of the system into which their components are incorporated. Without this critical systems knowledge, a component supplier will have difficulty meeting the time-to-market and functionality requirements of the communications equipment manufacturers, thereby resulting in costly delays and missed revenue opportunities.

Advanced Technologies and Processes that Enable High-Speed Transmission. Building high-speed integrated circuits requires access to specialized process technologies and advanced circuit design approaches. The vast majority of the semiconductor industry employs a Complementary Metal Oxide Semiconductor, or CMOS, transistor built on silicon material. Because of demanding performance requirements, alternatives to traditional CMOS have emerged in the communications industry. Specifically, Gallium Arsenide, or GaAs, and Silicon Germanium, or SiGe, as well as new CMOS processes have emerged as semiconductor technologies that are effective in addressing high-speed optical communications requirements. Component suppliers are also exploring other semiconductor technologies, such as Indium Phosphide, or InP, as well as new generations of GaAs, SiGe and CMOS, to address the requirements of future, higher speed communications systems. Each of these processes poses significant challenges and has distinct characteristics that require extensive knowledge and expertise. Communications equipment manufacturers are looking for component suppliers that have the necessary expertise to use the optimal processes in order to provide next generation optical systems solutions for their customers.

Highly Integrated Product Solutions. In order to rapidly and cost effectively introduce new products and simplify the design and manufacture of optical networking systems, communications equipment manufacturers seek component suppliers that can provide highly integrated solutions. These integrated solutions are modules or higher-level assemblies that combine numerous discrete components into a package or board to be sold as a single product, which eliminates the time and expense associated with sourcing and integrating components from multiple suppliers. As systems are manufactured in greater volumes, communications equipment manufacturers require that modules and higher-level assemblies be integrated further into multi-chip or single-chip solutions. This integration provides for faster and more efficient production, reduced part count and smaller design for placement into the network equipment, significantly reducing manufacturing costs for communications equipment manufacturers.

Strategy

Our goal is to become the leading global supplier of high value component solutions for optical networking systems. Key elements of our strategy include:

Leveraging Core Competencies to Rapidly Introduce Products that Enable Next Generation Optical Systems

We have developed substantial competencies in mixed-signal circuit and module design and advanced semiconductor process technologies. We have also recently developed core competencies in Very Large Scale Integration, or VLSI, circuit architecture and design including forward error correction, or FEC, technologies. We intend to continue providing sophisticated products that meet the requirements of next generation optical networking systems. We will continue to capitalize on our design competencies and our integration capabilities to provide our customers with new modules and higher-level assemblies so they can quickly and cost- effectively introduce new systems with greater functionality. We will continue to develop new products using leading-edge technologies that allow us to transition these modules and higher-level assemblies into highly integrated, multi-chip or single-chip solutions, enabling us to address our customers’ higher volume production requirements.

Expanding Our Customer Relationships and the Breadth of Our Customer Base

We intend to strengthen our existing customer relationships and expand our customer base by continuing to target leading edge communications equipment manufacturers, anticipating their needs through a collaborative design and development process and providing ongoing, in-depth customer support. We participate early in the design process of our customers’ products and aid in the design of their future systems architecture. Our application engineers and marketing personnel work closely with our customers to define and implement the appropriate solution and to provide continuous support. This extensive customer interaction allows us to further develop our systems expertise and to expand the functionality of our products in our customers’ optical networking systems, providing us with a strategic advantage over our competitors.

Maintaining and Extending Technology Leadership

We intend to maintain and extend our technological advantage in the design and development of components for next generation optical networking systems by further investing in research and development, focusing on high bit rate component solutions and vigorously recruiting and retaining talented engineers. We will also continue to work closely with our foundry and technology partners to drive the development of future generation process technologies.

Pursuing Strategic Acquisitions and Strategic Relationships

We may pursue strategic acquisitions that provide us with complementary products and technologies and highly qualified engineering personnel. We also intend to continue to establish strategic relationships to expand our technology leadership and secure access to advanced process technologies. We believe that establishing strategic relationships with companies with products or technologies that we deem complementary to our current and future offerings will enable us to more effectively penetrate new and existing market segments and offer our customers additional high value solutions.

Continuing to Address Both the Core and Metropolitan Portions of the Optical Transport Network

We provide product solutions for optical networking systems in the innovative and high-growth network core market. We will continue to build on our expertise in DWDM and long-haul applications for the core of the network. We have also leveraged this expertise and are providing product solutions for emerging metropolitan or regional optical networking systems as OC-192 is beginning to be deployed in this portion of the network.

Products

We design and develop advanced products targeted for use in high bandwidth optical networking systems. These products consist of integrated circuits, modules and higher-level assemblies that generate, manipulate, transmit and receive electrical and optical signals.

Our products focus on three segments of optical networking systems: the physical media dependent layer, or PMD, the physical layer and the datalink layer. Collectively, the products within these segments connect data processing devices to optical fiber and constitute an integral part of optical networking systems.

The following is a diagram that shows the different functions required for fiber optic transmission systems:

PMD layer devices perform the conversion between electrical and optical signals and can be categorized as either transmitters or receivers. Transmitters convert voice and data transmissions carried as electrical signals into optical signals for transmission over optical fiber, while receivers convert optical signals into electrical signals. Transmitters are composed of an electrical-to-optical, or E/O, converter, which converts electrical signals to optical pulses, and a driver, which amplifies and conditions signals for use by the E/O converter. E/O converters are composed of a light source, or laser, and an external modulator, which creates individual pulses of light, or optical signals. Receivers consist of a semiconductor device that converts an optical signal into electrical pulses, an optical-to-electrical, or O/E, converter, and a transimpedance amplifier, or TIA, which amplifies these electrical pulses.

The physical layer is composed of mixed-signal devices, which include both digital and analog circuits and can be categorized as either multiplexers or demultiplexers. Multiplexers combine multiple slower signals into a single high-speed signal, while demultiplexers perform the reverse function.

Datalink layer devices connect the physical layer to networking equipment. Datalink layer devices have three primary functions: framing, mapping and forward error correction, or FEC. In framing and mapping, which generally occur simultaneously, data is placed in formatted frames, prior to being transmitted over fiber, to make the data recognizable at the receiving end of the transmission. In FEC, data is placed in special frames that can be used to correct errors that occur during transmission.

Our PMD Products

There are two primary types of modulators: crystal-based modulators, which offer optimal performance for long-haul systems but consume significant power and cannot be integrated with lasers; and semiconductor-based modulators, which use less power and can feature on-chip integration with lasers. We currently produce several drivers for crystal-based modulators. These products have been designed to improve signal quality and system efficiency. We have developed Micro-Module^TM technology that allows us to integrate several high-speed devices into a single Ball Grid Array, or BGA, package, which is used in our next generation of PMD devices. This technology provides a dramatic reduction in size and cost for this type of product. We are investing in development of future versions of these drivers, integrating more functions and improving performance.

Our Physical Layer Products

We have broad experience in the production of physical layer products. We have designed our multiplexers with exceptionally low jitter, which is a type of noise in optical channels, directly improving signal quality and transmission distance. We have designed our demultiplexers with highly sensitive signal processing that eliminates the need for additional components to perform the same function. Our demultiplexers are highly insensitive to jitter, allowing for longer optical transmission distances. We are currently broadening our portfolio of multiplexers and demultiplexers to include product offerings that incorporate greater functionality, higher-levels of integration, smaller physical size, lower power consumption and tighter integration with our datalink layer components. We are currently involved in the development of products that will operate at speeds of 40 Gb/s.

Our physical layer products can incorporate the following functions:

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Clock Multiplier Unit, or CMU, converts the clock at the input of the multiplexers into the higher speed clock needed at the output. Clocks synchronize the movement of data throughout communications systems;

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Input Phase Locked Loop, or IPLL, synchronizes the transfer of data from Datalink devices into a multiplexer;

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Loss of Signal, or LOS, is an alarm that SONET/SDH systems need to analyze potential system faults;

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Clock and Data Recovery, or CDR, extracts data from the noisy signals received from optical systems; and

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Jitter filtering.

Datalink Layer Products

We are currently investing in the development of numerous datalink layer products, including FEC devices and Framer/Mappers that integrate the framing and mapping functions. In FEC, we have invested heavily in algorithm, architecture and product development for both

standards-based FEC and advanced FEC. FEC allows communications equipment manufacturers to increase the number of DWDM optical channels in a fiber strand and/or to increase the length of the fiber transmission system. In addition, FEC devices can be designed to support new optical networking standards.

Our first FEC device, the MTC6130, is currently available, while a second FEC device, the MTC6131 SuperFEC^TM is sampling to customers. Future FEC products will address higher performance, higher levels of integration, and/or higher bit rates. Framer/Mappers in development include advanced products for 10 Gb/s and 40 Gb/s systems, as well as devices targeted for Gigabit Ethernet applications in the Metro market.

Customers

In 2001, we shipped our products to over 30 customers, including Alcatel, Nortel, Ciena, ONI, Cisco, JDS Uniphase, Sycamore, Lucent, TyCom, and Marconi. We sell our integrated circuits, modules and higher-level assemblies to leading and emerging communications equipment manufacturers that develop high-speed optical transport systems.

TyCom and Alcatel accounted for approximately 34% and 29% of our revenues in 2001. Lucent, Alcatel and Cisco accounted for approximately 34%, 28% and 11% of our revenues in 2000. Lucent, Alcatel, and TyCom accounted for approximately 36%, 20% and 18% of our revenues in 1999.

Strategic Relationships

We have established strategic relationships with both TRW and IBM. We have entered into these strategic relationships with the objective of building and maintaining relationships with leading suppliers of semiconductor process technologies in order to diversify our product and technology base. In June 1997, we entered into a supply agreement with TRW pursuant to which TRW supplies us with a certain number of processed GaAs wafers annually for a fixed price per wafer. The agreement was amended in June 1999 to revise the wafer delivery requirement. In October 2000, we entered into a short-term foundry agreement with TRW to purchase Indium Phosphide development wafers or wafers designed using Indium Phosphide technology, for a fixed price per wafer. This agreement was amended in November 2000 and December 2000 to revise the number of development wafers to be purchased. During May 2000, we entered into a series of agreements with IBM. Our semiconductor development agreement with IBM provides us with certain models and design kits for use in the fabrication process to develop new integrated circuits. We provide IBM with prototype designs, and IBM fabricates mask sets corresponding to our designs, schedules wafers starts and processes the wafers. In exchange for IBM’s development efforts and access to their fabrication process, we make certain fixed payments to IBM. Under our joint development agreement with IBM, pursuant to which we licensed to IBM and IBM licensed to us, certain technology, we jointly develop integrated circuits. We are both permitted to sell the jointly created products to third parties, subject to a fixed royalty fee payable to the other party. In addition, during July 2001, we entered into a volume purchase agreement with IBM pursuant to which IBM will provide us with SiGe wafers for a fixed price per wafer. There are no minimum purchase requirements under this agreement that expires in May 2005. The terms of the IBM agreements are intended to serve our strategic objectives by providing us with access to key technologies, which are instrumental in the development of our business.

Sales, Marketing and Customer Support

Sales

We target leading and emerging communications equipment manufacturers that develop high-speed optical transport networking systems. We manage the sales process by interacting with our customers at multiple layers of our organization. Our initial contact with a potential customer generally begins with either direct contact by our management or sales force or through third- party manufacturers’ or independent sales representatives. Our strategic account managers and marketing personnel manage the customer relationship throughout the pre- and post-sales process. As needed, systems engineering personnel have detailed technical interactions with our customers during product definition. Our application engineers assist the customer in designing the solution into the customer’s systems. Close interaction further enables us to establish strategic customer programs or relationships.

We sell our products through our direct sales force and through independent sales representatives working under the direction of our strategic account managers. As of December 31, 2001, our direct sales force consisted of 48 direct sales professionals, application engineers, managers and administrative personnel located at our headquarters in Somerset, New Jersey and other locations in the United States, and in Germany, Canada, Italy and the United Kingdom. We expect to open additional sales offices and to increase our direct sales force worldwide.

Marketing

We market our products extensively in North America and Europe to establish our visibility as a leading supplier of high value components for optical networking systems and have begun to expand into Asian markets. As of December 31, 2001, our marketing staff included 16 marketing professionals and administrative personnel. Our marketing activities include:

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seminar programs, trade shows, guest speaker invitations and technical conferences;

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public relations activities and customer events;

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advertising, technical articles in industry publications and marketing collateral materials; and

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communication on the Internet.

Customer Service and Support

Our customer support activities are primarily managed by our applications engineering group consisting of both field applications engineers and internal applications experts. This group supports customers during their design activities to facilitate our customers’ success, and can perform experiments to validate customers’ design ideas including insertion into our fiber optic test facility. Our philosophy is to provide comprehensive customer support to facilitate the design of our complex products into our customers’ systems. Our applications engineering group is also the initial point of contact for our customers should they experience any problems with a product after purchase.

Manufacturing

We outsource the fabrication and assembly of most of our semiconductor devices, modules, high level assemblies and transceivers. We have in-house semiconductor testing capabilities that allow us to develop and perform testing for low volume production. We also have in-house final assembly and test for our high-level assemblies and transceivers. We expect to continue our outsource strategy and to continue to move our testing from our in-house capabilities to outside vendors for higher volume production. As a fabless semiconductor company, we are able to concentrate our resources on supply chain management design, development and marketing of our products. During October 2001, we obtained our ISO 9001:2000 certification from the International Organization of Standardization. ISO 9001:2000 refers to an international set of quality management system standards that organizations use worldwide. ISO 9001:2000 requires that we plan and manage the process necessary for the continual improvement of our quality management system.

Wafer Manufacturing

We outsource substantially all of our semiconductor fabrication to several of the world’s leading foundries for high bit-rate technologies including TRW, IBM, TriQuint Semiconductor, and Conexant. The older generation of our mixed-signal products, which comprised a significant portion of our 2001 revenue, is based predominantly on GaAs HBT wafers supplied by TRW. The wafers for the third and fourth generation of our mixed-signal products are based on SiGe technology supplied by IBM. Our manufacturing strategy is to qualify and utilize leading process technology for the fabrication of high bit-rate semiconductor devices and to utilize our foundries for a variety of different semiconductor technologies. There are certain risks associated with our dependence upon external foundries, including reduced control over delivery schedules, quality assurance, manufacturing yields and costs, the potential lack of adequate capacity during periods of excess demand, limited warranties on wafers or products supplied to us, increases in the prices and potential misappropriation of our intellectual property. Finding alternative sources for these wafers will result in substantial delays in production and additional costs. Our intent is to have volume purchase agreements with all of our key suppliers, with agreements on product quantities, prices and delivery lead times.

Packaging, Assembly and Testing

The primary vendors for the packaging, assembly and testing of our integrated circuit products are Kimbell Electronics Group, ASAT Inc. and Siliconware Precision Industries Co., Ltd. ASAT is currently building product for us in their facility in Nancy, France. We have also begun to qualify ASAT’s manufacturing process in their Hong Kong facility and we may begin to utilize this facility in the future. The primary outsource vendor for the assembly and testing of our driver module products is Natel Engineering Co., Inc., and the majority of our surface mount technology assembly is being contracted from SMTEK International and Flextronics.

We operate in-house module manufacturing facilities that allow rapid prototyping and development of new products and also serve to complement our outsource module manufacturing partners. We have in-house module and integrated circuits testing facilities in California, New Jersey, Germany and Israel. We maintain comprehensive review and inspection of our outsourcing facilities to ensure compliance with our quality standards for manufacturing assembly and test. Our manufacturing processes and outsource vendors utilize stringent quality controls, including incoming material inspection, in-process testing and final test, and all are ISO 9001 certified.

Research and Development

As of December 31, 2001, we had 208 employees dedicated to research and development, of whom 118 hold advanced degrees, including 26 PhDs. We have additional engineering employees dedicated to marketing, application engineering and business development. These employees are involved in advancing our core technologies and applying these core technologies to product development and activities in our targeted markets.

We believe that the achievement of higher-levels of integration, functionality and performance and the introduction of new products in our target markets is essential. As a result, we have made and will continue to make substantial investments in research and development. Our research and development expenses, exclusive of deferred stock compensation and warrant issuances, for 2001, 2000 and 1999 were approximately $54.7 million, $24.6 million, and $8.8 million, respectively.

Competition

We compete with component suppliers for optical networking systems. We believe that the principal factors of competition for these markets are:

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product time-to-market;

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product performance;

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product price;

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product quality;

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product reliability;

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success in designing and subcontracting the manufacture of new products that implement new technologies;

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market acceptance of competitors’ products;

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efficiency of production;

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expansion of production of our products for particular systems manufacturers; and

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customer support and reputation.

We believe we compete favorably with respect to each of these factors.

We compete with a number of major domestic and international suppliers. We compete primarily against Agere, Applied Micro Circuits, Giga (acquired by Intel), Infineon, JDS Uniphase, Maxim, MindSpeed (a Conexant company), Nortel (microelectronics division), NTT Electronics, Philips, PMC-Sierra and Vitesse. In addition to these established companies, we also compete with various start-up entities. In certain circumstances, most notably with respect to application specific integrated circuits, or ASICs, supplied to Lucent and Nortel, our customers or potential customers have internal integrated circuit and/or manufacturing capabilities.

In addition, suppliers may begin to offer product solutions increasingly including both electronic and optical components. This creates the potential that suppliers of optical components, which are currently complementary to suppliers of electronic components, may become competitors as they broaden their product portfolio with electronic components, or vice versa. Companies with existing capabilities or products in both areas may benefit from significant competitive advantages.

Intellectual Property

We rely on a combination of copyright, patent, trademark, trade secret and other intellectual property laws, nondisclosure agreements and other protective measures to protect our proprietary rights. We also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect such intellectual property. To date, we have one U.S. patent issued and 11 U.S. patent applications pending.

Although we employ a variety of intellectual property in the development and manufacturing of our products, we believe that none of such intellectual property is individually critical to our current operations. However, taken as a whole, we believe our intellectual property rights are significant and that the loss of all or a substantial portion of such rights could have a material adverse effect on our results of operations. There can be no assurance that our intellectual property protection measures will be sufficient to prevent misappropriation of our technology. In addition, the laws of many foreign countries do not protect our intellectual properties to the same extent as the laws of the United States. From time to time, we may desire or be required to renew or to obtain licenses from others in order to further develop and market commercially viable products effectively. There can be no assurance that any necessary licenses will be available on reasonable terms.

Backlog

Our sales are made primarily pursuant to standard purchase orders for delivery of products. Quantities of our products to be delivered and delivery schedules are frequently revised to reflect changes in customer needs. For these reasons, our backlog as of any particular date is not representative of actual sales for any succeeding period. Accordingly, our actual sales could be materially different than our recorded backlog.

Environmental Matters

We are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines on us, the suspension of production or a cessation of operations. In addition, such regulations could restrict our ability to operate or expand any of our manufacturing facilities or could require us to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges.

Employees

As of December 31, 2001, we had a total of 382 employees, including 64 in sales and marketing and application engineering, 72 in manufacturing, purchasing and quality, 208 in research and development and 38 in general and administrative functions. Of these employees, approximately 277 were located in North America, 76 were located in Europe and 29 were located in Israel. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppages. We consider our relations with our employees to be good.

Item 2. PROPERTY

Our corporate headquarters facility, of approximately 36,000 square feet, is located in Somerset, New Jersey. We lease our corporate headquarters facility pursuant to a sublease agreement that expires in April 2007 for approximately 12,000 square feet and pursuant to a lease agreement that expires in February 2006 for approximately 24,000 square feet. We also lease our principal design facility, consisting of approximately 31,000 square feet, in Somerset, New Jersey, pursuant to a lease agreement that expires in October 2006. We lease approximately 29,600 square feet of design space in Santa Monica, California pursuant to a lease agreement that expires in December 2005. We lease approximately 7,000 square feet for a design center in Allentown, Pennsylvania pursuant to a lease agreement that expires in September 2006 and 1,800 square feet for a sales office in Los Altos, California pursuant to a lease agreement that expires in August 2003.

In addition, we have lease agreements for an approximately 11,800 square feet facility in Bochum, Germany, which expires in January 2011, an approximately 19,400 square feet facility in Munich, Germany, which expires in December 2005, an approximately 5,400 square feet facility in Berlin, Germany, which expires in December 2005, an approximately 3,500 square feet facility in Kaunas, Lithuania, which expires in November 2004, an approximately 13,000 square feet facility in Israel, of which approximately 6,500 square feet expires in each of February 2003 and January 2004, and an approximately 2,200 square feet facility in Milan, Italy, which expires in July 2007. These facilities are used predominantly for research and development and sales activities.

Item 3. LEGAL PROCEEDINGS

In the ordinary course of our business, we are the subject of, or party to, various pending or threatened legal actions. We believe that any liability arising from these actions will not have a material adverse effect on our financial position, results of operations or cash flows.

As disclosed in prior filings, in May and June 2001, a former employee, Matthias Bussmann, sent correspondence to us claiming, among other things, that our Chief Executive Officer and our Executive Vice President breached a promise relating to Dr. Bussmann’s compensation and misused their power to reward themselves while engaging in a scheme to oust Dr. Bussmann from the Company. Dr. Bussmann alleged that his claims form the basis for a claim of breach of fiduciary duty by those officers. The correspondence proposed settlement payments by us of up to $1.0 million in cash and the transfer of one million shares of common stock. We received no correspondence regarding this matter during the fourth quarter of 2001. While we believe the allegations set forth in Dr. Bussmann’s letters to us are without merit, we cannot predict the ultimate outcome of any litigation, should it be initiated.

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

No matters were submitted to a vote of security holders during the quarter ended December 31, 2001.

PART II

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Recent Market Prices

Our Class A common stock began trading under the symbol MLTC on the NASDAQ National Market System on June 21, 2001. Preceding June 21, 2001, there had been no public market for our common stock.

The markets for securities such as our common stock historically have experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations and other factors, such as new product developments and trends in our industry and the investment markets generally, as well as economic conditions and quarterly variations in our results of operations, may adversely affect the market price of our common stock.

The high and low bid prices for our Class A common stock as reported by the NASDAQ Stock Market for the periods indicated are as follows. Such prices are inter-dealer prices without retail markups, markdowns or commissions, and may not necessarily represent actual transactions.

2001	High	Low
Second Quarter (1)	$14.74	$9.32
Third Quarter	$18.40	$4.31
Fourth Quarter	$ 8.33	$3.20

(1)

For the period from June 21, 2001 to June 30, 2001.

As of March 18, 2002 there were approximately 3,800 record holders of our Class A common stock and there were 4 record holders of our Class B common stock. On March 20, 2002 the last reported sale price of the Class A common stock on the Nasdaq National Market was $2.02 per share.

Our Class B common stock is not publicly traded. Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock and is automatically converted upon sale and most other transfers.

Dividend Policy

We have never declared or paid cash dividends on shares of its capital stock. We currently intends to retain all of its earnings, if any, for use in its business and in acquisitions of other businesses, products or technologies and does not anticipate paying any cash dividends in the foreseeable future.

Item 6. SELECTED FINANCIAL DATA

The statement of operations data set forth below for the years ended December 31, 2001, 2000, and 1999 and the balance sheet data as of December 31, 2001 and 2000 have been derived from our audited consolidated financial statements included elsewhere herein, and should be read in conjunction with those financial statements (including notes thereto). The selected financial data as of December 31, 1999, 1998 and 1997 and for the years ended December 31, 1998 and 1997 have been derived from audited consolidated financial statements not included herein, but which were previously filed with the Securities and Exchange Commission, or SEC.

	Year Ended December 31,
	1997		1998		1999		2000		2001
Statement of Operations Data:
Revenues:
Product	$	94	$	2,126	$	19,383	$	72,721	$	130,468
Development		1,447		1,726		1,012		—		—

Total revenues		1,541		3,852		20,395		72,721		130,468

Cost of revenues:
Product and development		1,178		1,847		6,748		27,048		48,574
Inventory write down		—		—		—		—		8,788
Deferred stock compensation		—		—		19		834		2,051

Total cost of revenues		1,178		1,847		6,767		27,882		59,413

Gross profit		363		2,005		13,628		44,839		71,055

Operating expenses:
Research and development, excluding deferred stock compensation		650		2,219		8,779		24,624		54,741
Research and development—warrant issuance		—		—		—		6,375		—
Sales and marketing, excluding deferred stock compensation		190		349		2,292		7,130		17,387
General and administrative, excluding deferred stock compensation		266		391		1,767		7,611		11,795
Deferred stock compensation		—		344		803		6,076		9,895