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Corvis Keeps Gratings in the Family

Corvis has spent at least $11M on gratings from a company controlled by its chairman and founder, David Huber

October 1, 2002

4 Min Read
Corvis Keeps Gratings in the Family

Two companies with which Corvis Corp. (Nasdaq: CORV) has ties -- ACME Grating Ventures LLC and ACME Gratings Inc. -- sound like the famous mail order company where Wile E. Coyote bought anvils, defective catapults, and bombs that never quite went off at the right time.

Alas, they're not the same. But figuring out exactly what each ACME company does is as elusive a task as catching Mr. Coyote's nemesis, the Roadrunner.

Neither ACME Grating Ventures nor ACME Gratings has a listed phone number. The only third-party mention of ACME Gratings Light Reading could find, other than in SEC filings, was a small listing in a business directory published by Gale, The Thomson Corp. division. The address given is the same as Corvis' corporate headquarters.

Corvis' SEC filings shed some light on these mysterious firms. As it turns out, both companies appear to be controlled by Corvis founder and chairman David Huber. They have been primarily in the business of selling Huber's intellectual property to Corvis, a company he also controls.

In 2000 and 2001, Corvis did about $11 million worth of business with ACME Grating Ventures, a company in which Corvis has a 99 percent economic interest, the filings say.

Huber, who owns about 25.5 percent of Corvis, owns the remaining 1 percent of ACME Grating Ventures through the other entity, ACME Gratings. Huber owns 100 percent of ACME Gratings. Even though Corvis gets 99 percent of ACME Grating Ventures' net profits, it has only a 49 percent voting interest in the company. The majority voting interest is held by ACME Gratings (which Huber owns -- remember?), so Huber ultimately gives the final word for both ACME-named entities.

Got all that? Good. Let's move on...

The SEC filings say ACME Grating Ventures uses Corvis' "facilities, personnel, equipment, and certain intellectual property." The Huber-owned ACME Gratings also contributed some intellectual property to ACME Grating Ventures. But before Corvis sees a dime from its interest in ACME Gratings Ventures, it must reimburse ACME Gratings for some $325,000 in "startup costs," the filings state.

This ACME situation is giving Corvis critics more grist for their metaphorical mills. One common complaint about the company is that it is involved in too much insider dealing. Some also say the ownership structure does not allow for enough independent oversight, for a company that has public ownership.

One major institutional investor in the company, asking to speak on condition of not being named, said he's been so angered by the self-dealing at the company that his firm has considered filing lawsuits against the company.

In May, Corvis completed its all-stock acquisition of Dorsal Networks, a privately held vendor of undersea optical networking gear. Huber owned 31 percent of Dorsal.

The Dorsal deal was valued at $90 million at the time, which is now almost half of Corvis' market capitalization. Corvis says Dorsal's technology is crucial for it to pursue transoceanic network upgrades and new builds. Corvis already owned 3 percent of Dorsal at the time the deal took place. Corvis' SEC filings described Dorsal as "a majority owned subsidiary of Optical Capital Group," a venture firm in which Huber has a 34 percent stake.

Corvis has many links to other optical networking companies via Huber, who founded Ciena Corp. (Nasdaq: CIEN) and has been granted some 41 patents for his optical networking innovations. Corvis also does business with several companies that were funded by Optical Capital Group, Huber's VC firm.

Corvis declined to elaborate on the information it disclosed in its SEC filings.

Some analysts are getting impatient with the company, which doesn't appear to have cut back its spending in the telecom downturn as fast as others have. "R&D spending has got to be tapered back. Corvis has done a lot to curb their [cash] burn, but they're still burning about $25 million a quarter on revenues that are in the single-digit millions," says Rick Schafer, an analyst at CIBC World Markets.

In other Corvis news, the company announced Tuesday that its stock listing had been transferred to the Nasdaq SmallCap Market, a market for smaller securities that don't qualify for listing on the Nasdaq National Market (see Corvis Moves to SmallCap). Corvis may be eligible to transfer back to the Nasdaq National Market if its bid price maintains the $1 per share requirement for 30 consecutive trading days, the company says.

Corvis, which traded at $1.45 a year ago today, traded at $0.55 late Tuesday afternoon.

— Phil Harvey, Senior Editor, Light Reading

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