[Federal Register Volume 67, Number 207 (Friday, October 25, 2002)]
[Notices]
[Pages 65615-65617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27223]


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SECURITIES AND EXCHANGE COMMISSION

[Release Number IC-25774; 812-12598]


Corvis Corporation; Notice of Application

October 21, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application under section 3(b)(2) of the Investment 
Company Act of 1940 (the ``Act'').

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Summary of Application: Applicant Corvis Corporation (``Corvis'') seeks 
an order under section 3(b)(2) of the Act declaring it to be primarily 
engaged in a business other than that of investing, reinvesting, 
owning, holding or trading in securities. Corvis is a 
telecommunications company that designs, manufactures, and sells high 
performance optical networking products.

Filing Dates: The application was filed on August 7, 2001 and amended 
on October 18, 2002.

Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on November 15, 2002, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicant, 7015 Albert Einstein 
Drive, Columbia, MD, 21046-9400.

FOR FURTHER INFORMATION CONTACT: Julia Kim Gilmer, Senior Counsel, at 
(202) 942-0528, or Janet M. Grossnickle, Branch Chief, at (202) 942-
0564 (Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. 202-942-8090).

Applicant's Representations

    1. Corvis, a Delaware corporation, is in the business of designing, 
manufacturing and selling high performance optical networking products 
through its direct and indirect interests in wholly-owned subsidiaries 
and Acme Grating, LLC (``Acme Grating''), a company it controls within 
the meaning of section 2(a)(9) of the Act.\1\ As a development stage 
company, Corvis' operations consisted primarily of research and 
development, product design, manufacturing and testing of optical 
communications systems. As an operating company, Corvis has conducted 
field trials for customers, deployed transmission and switching 
equipment, built up finished goods inventory to support customer 
service orders, and sold products to its customers.
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    \1\ Corvis owns 49% of the voting shares and 99% of the economic 
interest in Acme Grating. Acme Grating owns certain licensed 
intellectual property that it uses to manufacture gratings that 
Corvis purchases and uses in its operations. Corvis states that, as 
of June 29, 2002, Acme Grating had total assets of $0.
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    2. Corvis states that it needs to maintain a large amount of 
capital in order to cover expenses related to the research and 
development of new technology, products, product enhancements, and 
other operational expenses such as marketing. Corvis desires to use a 
portion of its working capital to invest in short-term, investment 
grade securities, as outlined in its investment policies which are 
attached to the application (``Capital Preservation Investments''), 
pending the use of such capital for its current and future operations. 
Corvis also states that it must preserve capital for carrying out 
future mergers and acquisitions and for entering into strategic 
partnerships and joint ventures.
    3. Corvis also makes and expects to continue making investments in 
long-term, non-controlling, strategic investments in the debt or equity 
securities of other entities (``Strategic Investments''). Corvis states 
that its current Strategic Investments are invested in developing-stage 
privately held companies that are engaged in businesses that Corvis 
believes complement its technology. Corvis further states that it views 
its Strategic Investments as a means to facilitate the development of 
next-generation technology and foster positive relations with companies 
that Corvis believes will add value to its products.
    4. In October 2000, Corvis created Corvis US Capital, Inc. (``US 
Capital''), a Delaware corporation, for tax and business reasons 
unrelated to the Act, to hold Corvis' cash, Capital Preservation 
Investments, Strategic Investments and other marketable investment 
securities. Corvis indirectly owns all of the outstanding securities 
(other than short-term paper and directors' qualifying shares) of US 
Capital. Corvis states that it has not, does not currently, and does 
not intend in the future to engage in short-term trading of any 
securities, including Capital Preservation Investments and Strategic 
Investments.

Applicant's Legal Analysis

    1. Corvis seeks an order under section 3(b)(2) of the Act declaring 
that it is primarily engaged in a business other than that of 
investing, reinvesting, owning, holding or trading in securities, and 
therefore not an investment company as defined in the Act.
    2. Under section 3(a)(1)(C) of the Act, an issuer is an investment 
company if it is engaged or proposes to engage in the business of 
investing, reinvesting, owning, holding or trading in securities, and 
owns or proposes to acquire investment securities having a value in 
excess of 40% of the value of the issuer's total assets (exclusive of 
Government securities and cash items) on an unconsolidated basis. 
Section 3(a)(2) of the Act provides that ``investment securities'' 
include all securities except government securities, securities issued 
by employees' securities companies, and securities issued by majority-
owned subsidiaries of the owner which (i) are not investment companies, 
and (ii) are not relying on the exclusions from the definition of 
investment company in section 3(c)(1) or 3(c)(7) of the Act.
    3. Corvis states that as of June 29, 2002, 82% of its total assets 
(exclusive of government securities and cash items), on an 
unconsolidated basis, consistent of investment securities as defined in 
section 3(a)(2) of the Act. Corvis believes that this percentage may 
rise as it acquires additional Capital Preservation Investments, writes 
down the value of certain assets (such as goodwill), takes 
restructuring charges, and disposes of other assets (such as excess or 
obsolete inventory and surplus equipment).
    4. Rule 3a-1 provides an exemption from the definition of 
investment company if no more than 45% of a company's total assets 
consist of, and

[[Page 65616]]

not more than 45% of its net income over the last four quarters is 
derived from, securities other than government securities and 
securities of majority-owned subsidiaries and companies primarily 
controlled by it. Corvis states that it cannot rely upon rule 3a-1 
under the Act because it has suffered operating losses for the twelve 
months ended June 29, 2002, while earning some investment income during 
the same period.
    5. Section 3(b)(2) of the Act provides that, notwithstanding 
section 3(a)(1)(C) of the Act, the Commission may issue an order 
declaring an issuer to be primarily engaged in a business or businesses 
other than that of investing, reinvesting, owning, holding, or trading 
in securities either directly, through majority-owned subsidiaries, or 
controlled companies conducting similar types of business. Corvis 
requests an order under section 3(b)(2) of the Act declaring that it is 
primarily engaged in a business other than that of investing, 
reinvesting, owning, holding or trading in securities, and therefore 
not an investment company as defined in the Act.
    6. In determining whether a company is primarily engaged in a non-
investment company business under section 3(b)(2), the Commission 
considers: (a) The issuer's historical development; (b) its public 
representations of policy; (c) the activities of its officers and 
directors; (d) the nature of its present assets; and (e) the sources of 
its present income.\2\
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    \2\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947).
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    a. Historical Development. Corvis has been a development stage 
company from the time of its inception until July 2000 and an operating 
company from that time to the present. As a development stage company, 
Corvis' operations consisted primarily of research and development, 
product design, manufacturing, and testing of optical communications 
systems. As an operating company, Corvis has conducted field trials for 
customers, deployed transmission and switching equipment and built up 
finished goods inventory to support customer service orders and sold 
products to its customers. Corvis states that all of its activities 
since its formation have been devoted solely to designing, 
manufacturing and marketing high performance optical communications 
systems. Corvis has not disposed of any of its Strategic Investments 
and does not plan to dispose of any Strategic Investments in the 
foreseeable future.
    b. Public Representations of Policy. Corvis states that it has 
never represented that it is involved in any business other than 
designing, manufacturing and selling high performance optical 
networking products. Corvis asserts that it has consistently stated in 
its reports to stockholders, press releases and filings with the 
Commission that it is a telecommunications company. Corvis states that 
it has emphasized operating results and has never emphasized either its 
investment income or the possibility of significant appreciation from 
its Capital Preservation Investments or Strategic Investments as a 
material factor in its business or future growth.
    c. Activities of Officers and Directors. Corvis states that its 
senior officers and directors are actively engaged in the management of 
telecommunications business and that their educational and business 
backgrounds are predominantly in the fields of engineering, physics, 
telecommunications, accounting, mathematics, marketing, software 
development, computer science, general management and law. Only two of 
the twenty-six directors, executive officers and key employees have a 
securities investment background or private equity experience. Three 
Corvis officers and a director from Corvis' Board of Directors 
(``Board''), who is not an officer or employee of Corvis, serve on a 
committee (the ``Investment Committee'') that manages the investment 
portfolio. The officers and director devote, on average, less than 1% 
of their time to matters relating to Capital Preservation Investments 
and Strategic Investments. The involvement of Corvis' Board in capital 
preservation efforts has been limited to establishing investment 
objectives for the Capital Preservation Investments. Further, Corvis 
states that its approximately 900 employees collectively spend 
approximately 58% of their time on research and development, 24% of 
their time designing and manufacturing products, 18% of their time on 
accounting, recruiting, marketing products, and other administrative 
matters, and less than 1% of their time on Capital Preservation 
Investments and Strategic Investments.
    d. Nature of Assets. Corvis states that as of June 29, 2002, its 
total assets (exclusive of Government securities and cash items, as 
such terms have been interpreted by the Commission or its staff), 
consolidated with US Capital, was $581.50 million, approximately 14.9% 
of which represented investment securities as defined in section 
3(a)(2) of the Act.\3\ Corvis further represents that as of June 29, 
2002, less than 1% of these investment securities were Strategic 
Investments, and the rest were Capital Preservation Investments. Corvis 
states that Capital Preservation Investments consist of short-term 
investment grade securities held by Corvis not for investment purposes, 
but to preserve its capital pending its use in operations. Corvis 
further states that Strategic Investments are not contemplated to 
comprise as much as 4% of Corvis' total assets.
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    \3\ Corvis states that the value of its interests in controlled 
conducting similar types of business is $0 million. Additionally, 
for the purposes of this analysis, US Capital's holdings of money 
market fund shares have been treated as ``cash items.'' Corvis 
states that these money market funds comply with rule 2a-7 of the 
Act and seek to maintain a stable net asset value of $1.00 per 
share. Corvis states that consolidating its assets with those of US 
Capital provides a more accurate picture of its telecommunications 
business because the assets held by US Capital will only consist of 
money market fund shares, other Capital Preservation Investments, 
some or all of the Strategic Investments and other marketable debt 
and equity securities. Moreover, since US Capital is a wholly-owned 
subsidiary, consolidation will not result in the type of distortions 
that could result from consolidating other types of subsidiaries.
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    e. Sources of Income and Revenue. Corvis states that its 
subsidiaries (other than US Capital) and Acme Grating, a controlled 
company, are emerging telecommunications businesses that typically 
generate little or no income for Corvis in the form of dividends or 
capital appreciation and have produced significant losses for Corvis to 
date. Corvis asserts that its activities as an operating company are 
more appropriately analyzed by evaluating Corvis' proportionate share 
of the revenues from directly-owned assets, wholly-owned subsidiaries 
and Acme Grating in light of Corvis' total revenues. Corvis states 
that, for the four quarters ending June 29, 2002, revenues from its 
directly-owned assets, wholly-owned subsidiaries and Acme Grating 
represented approximately 84.1% of Corvis' total revenues.\4\ Corvis 
expects that in the future, the percentage of its total revenues 
derived from operating activities will ordinarily be over 80% and the 
percentage derived from investments will ordinarily be under

[[Page 65617]]

20%. Corvis represents that it does not intend to derive a significant 
percentage of its revenues from income derived from the sale of 
interest in non-controlled companies.
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    \4\ For purposes of this analysis, revenues of the wholly-owned 
subsidiaries were consolidated and revenues of Acme Grating, a 
controlled company, were attributed to Corvis in proportion to 
Corvis' interests in Acme Grating. Corvis uses the equity method of 
accounting for Acme Grating, which under Generally Accepted 
Accounting Principles (``GAAP'') means that Acme Gratings' income or 
losses, but not revenues, are attributed to Corvis based on its 
ownership of Acme Grating. Acme Grating provided less than .1% of 
Corvis' total revenues. Corvis consolidates its wholly-owned 
subsidiaries, including US Capital, when preparing its financial 
statements in accordance with GAAP.
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    7. Corvis thus asserts that it satisfies the standards for an order 
under section 3(b)(2) of the Act.

Applicant's Conditions

    Applicant agrees that any order granting the requested relief will 
be subject to the following conditions:
    1. Corvis will continue to allocate and utilize its accumulated 
cash and Capital Preservation Investments, whether held directly or 
through US Capital, for bona fide business purposes.
    2. Corvis will not engage in trading in securities, either directly 
or through any of its subsidiaries, for short-term speculative 
purposes.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-27223 Filed 10-24-02; 8:45 am]
BILLING CODE 8010-01-M