Wave Issue 2000 1/3/00 Article 1-01

***Tracking Stocks - Where is the Beef?
(January 3)

We were faced with a simple question - what are the rules for
tracking stocks? It was not such a simple question after all.
After some research we came away with the impression that this
may be just another smoke and mirrors game similar to what
derivatives were a few years ago.

The rapid rise in technology and Internet stocks has left the
traditional enterprises questing for a piece of the action. Why
not create a special stock that reflects our participation in
these new markets? This appears to be the logic behind many of
these offers. Yet, we sought to understand what are the rules
that protect the ownership interests of the shareholders. We have
not found any.

In a rain dance the SEC stated it had none (or more specifically,
the representatives we talked to (about 7 of them) said it wasn't
under their division, the rules may change depending on the
company, and we should speak with other taxing agencies) and the
IRS told us to talk to the SEC.

Some of 1999's tracking stocks are the following:

Company – Tracking stock
AT&T – Liberty Media
Walt Disney – Go.com
Microsoft - Expedia
Ziff-Davis – ZDNet
Donaldson, Lufkin, & Jenrette Securities Corp. –
DLJdirect

More details available at:

www.wave-report.com/Trackingstocks.htm

For issuing companies, tracking stocks (sometimes called
targeting stocks) are a way to tap into investors' high valuation
of the subsidiary, without losing control of the unit. In the
past, companies have also set up tracking stocks for businesses
that are completely different from the core operations
shareholders know the parent company for (such as GM and Hughes
Satellite). Recently though, many businesses are using tracking
stock as a way to attract attention to operations which do the
same thing as the core business, except online. These companies
are hoping that investors will pay a higher price for their
Internet subsidiaries on their own than they would if they
remained within the parent company's fold.

The assets of the tracking stock portion of the business continue
to be owned by the parent and can be used against the
corporation's liabilities. In addition the capital raised through
the issuance of tracking stock is not restricted for use only by
the tracked business segment. This has caused problems in the
past when shareholders of the tracker begin to suspect their
money or the subsidiaries profits are benefiting the parent
company more than the subsidiaries.

The WAVE did find out that tracking stocks give companies certain
tax advantages. When a company uses a tracking stock it files
three sets financial statements - one for the entire company, one
for the company less the tracked division, and one for the
division itself. The parent company gets the benefit of the
tracked division's losses on total taxable income, but doesn't
include the losses on their income statement. This can give the
company an artificially high net profit margin by reducing the
tax rate. The parent company can also use the higher-valued
tracking stock in lieu of cash for acquisitions and partnerships.

The negative side of this is that the company cannot spin-off the
subsidiary without triggering negative tax consequences after a
tracking stock is issued.

For investors tracking stocks can be somewhat of a mixed bag.
Like regular stocks, tracking stockholders are entitled to
dividends paid out by the subsidiaries issuing the tracking
stock. Yet the owner of a tracking stock does not own a piece of
the company, instead, tracking stock shareholders often vote on
issues affecting the corporate parent, not the subsidiary whose
stock they own. Another downside is the fact that the board of
directors of the tracking-stock subsidiary is often put in place
by the parent company - and isn't elected by tracking stock
shareholders that could cause a conflict of interests.

Some investors do like tracking stocks because they offer
potentially high revenue growth and the opportunity to be part of
an emerging industry. Tracking stocks like Sprint's PCS division
have given the stocks this good appearance. Other stocks such as
ZDNet, Carmax and DLJdirect (see http://www.wave-
report.com/Trackingstocks.htm) have not done as well, so for
investors it seems like a risky proposition to us.