Losses Force Strategic Shift at Tech Firm.

Faced with ballooning losses and tighter capital markets, Chatsworth-based MRV Communications Inc. has pulled back from its plan to take some of its subsidiaries public through initial public stock offerings and is instead exploring the possibility of selling certain units outright.

When the optical network components firm spun off a piece of its Luminent subsidiary in a $144 million public offering last November, it was supposed to be the first of several offerings to raise capital while retaining control of proprietary technologies.

The company had grand plans for public offerings for as many as five of its other subsidiaries over the next year and a half, potentially raising hundreds of millions of dollars that MRV would then pour back into research and development.

But the economic slowdown has now caused those plans to unravel, with MRV delaying the IPO of Optical Access, its wireless products division. What's more, the company has indicated it might be willing to take a new tack - potentially selling off units in their entirety as it continues to rack up losses.

In the company's recent quarterly conference call, MRV President and CEO Noam Lotan assured investors that MRV has several financing alternatives to the public markets. Among them is the "possibility of M&A transactions" for its units, a new move for MRV, Lotan said.

"I had heard that they had been looking into putting a couple of units up for sale," said Christopher Schultz, an analyst with The Spin-off Report, a New York investment research firm that published a recent report on MRV. "They are spending lots of money on R&D, which is primarily why they need sources of financing. It's reasonable to assume they do have prospects in this market, but if they don't have money to commercialize these products, it's a lost game."

MRV has more than 15 operating units that collectively employ roughly 2,500 people, mostly at Luminent, which designs fiber-optic components for high-capacity data transmission. The company's Optical Access sub subsidiary designs optical wireless solutions for the last mile of the fiber-optic network, and the other units make network management applications, fiber-optic drivers, core routers, semiconductor optielectronic components, optical solutions for regional-area networks and modules for monitoring optical networks.

Lotan said no definite plans are in place to sell any of its units, and future financing would continue to come from IPOs and private placements from outside investors.

Lotan said "six or seven" of MRV's units are profitable. But in the first quarter of the year, ended March 31, the company's cash reserves had declined by about 9 percent, from $95 million to $86 million. That's enough to continue funding its units for at least another year, Lotan said.

MRV reported a net loss of $54.3 million (73 cents per diluted share) for the first quarter, compared to a net loss of $5.9 million (10 cents per share) in the like year-earlier quarter.

First-quarter revenues were $100.1 million, vs. $65.1 million in the first quarter of 2000.

Despite the tightening of capital markets, MRV, which sold an 8 percent stake in Luminent through an IPO last November, still plans to eventually spin off Luminent completely to the public.

Those plans, however, may not happen if current market conditions persist, Lotan said in the first-quarter 2001 conference call.

While Luminent's stock ended its first day of trading at $13.13 per share, it sank as low as $2.09 in April. It has since gained back much of that lost ground, closing May 31 at $9.71 a share.

If MRV were to sell some of its technologies, it might improve its cash flow and its value to the market, Schultz said.

"They have disclosed that they have core activities," he said. "It's possible the company could sell a variety of these units that right now are dragging its cash flow down."

Among the units ripe for a spin-off, Schultz said, are Charlotte's Networks, a core router manufacturer, and Zaffire, which makes optical components for regional-area networks.

Selling intellectual property to support core technologies is a method of financing commonly used by large firms like Raytheon Co., TRW Inc. and Hughes Electronics Corp., said Scott Alderton, a partner and intellectual property attorney at Akin Gump Strauss Hauer & Feld LLP in Los Angeles.

But with smaller firms, their core technology may be their only technology--and in effect, their entire business, he said. As a result, young tech companies having trouble raising financing or turning to the public for money are looking to joint ventures and contractual agreements.

But because many of MRV's units are still hazy in their description of what they do, it might be hard for the parent to find a willing buyer, he said.

MRV has already pulled back from taking its Optical Access subsidiary public, after having filed for an IPO last fall. In fact, all of MRV's IPOs originally planned within the next year and a half have been pushed back by six to 12 months, he said.

MRV's burn rate -- the pace at which it burns through cash -- in the last two quarters has been at between $60 million and $80 mil lion annually, significantly higher than it was last year, Schultz said. Lotan would not con firm burn rate figures.

But based on the financial information that is known about MRV and its various operating units, the company's future is decidedly cloudy.

"I think they might be able to sell (units), but whoever buys (them) should be good in.their due diligence," Schultz said.

MRV Communications Inc.

Headquarters: Chatsworth

Employees: 2,400 to 2,500

CEO: Noam Lotan

Core Business: Optical networking components

Founded: 1999

2000 Revenues: $319.4 million

2000 Net Loss: $153 million

Market Cap: $750 million

Collapsing Value