Xcelera.com adds to shareholder woes
By Mike Tarsala, CBS.MarketWatch.com
Last Update: 10:03 PM ET Aug 9, 2000 NewsWatch
Latest headlines
CAYMAN ISLANDS (CBS.MW) - Some investors in Internet incubator Xcelera.com are slowly learning that they likely will face an end-of-the-year tax hit because of their investment in the company.
Today on CBS MarketWatch
Dow slips as Nasdaq surge fades
Cisco surge lifts tech sector
Wal-Mart pressured after matching targets
Eli Lilly slides after Prozac patent ruling
Tokyo stocks slip ahead of BOJ rate meeting
More top stories...
CBS MarketWatch Columns
Updated:
8/10/2000 1:12:12 AM ET
Investors are expected to pay $2.35 a share in taxes at the end of the year, due to the roughly $300 million in gains that Xcelera (XLA: news, msgs) recognized after striking a deal with Web-hosting company Exodus on Mar. 23.
As part of a deal, Exodus paid $637.5 million in cash and stock for a 15 percent stake in Mirror Image, a unit of Xcelera.com.
It's a fresh wound for some investors, as even those who bought Xcelera.com shares only to see them plummet will be stuck paying for the company's financial gain. Xcelera shave lost nearly 90 percent of their value since sitting at a 52-week high of 112 1/2 in March. Shares now trade near 11 3/4.
The Internal Revenue Service is expected to label Xcelera a "foreign personal holding company." That means that investors can be stuck with the tax bill from the Exodus gain. And depending partly on gains from future deals or losses, it's possible that investors' total per-share taxes for this fiscal year, ended Jan. 31, could end up being more or less than $2.35.
Xcelera disclosed late last month in a form filed with the Securities and Exchange Commission that it likely will be given foreign personal holding company status. The company didn't issue a press release about the matter. Seemingly, the company left it to analysts and reporters to explain the tax implications to investors.
Executives from Xcelera were not made available to comment for this story. Company spokesman Paul Caminiti said he couldn't say on the record whether or not Xcelera executives purposely aimed to get the tax distinction.
The IRS determines that companies should be classified as a foreign personal holding company based on a formula. Part of the requirements for the distinction is that companies 5 or fewer individuals must own half of the company stock within the tax year. Also, the company must receive 60 percent of gross income from "certain passive sources."
When asked if the company made attempts to educate investors about their tax responsibilities, Caminiti said, "We've satisfied all of our requirements under the SEC."
The potential investor pitfall over the tax issue isn't the first time the company's management has come under fire. The company isn't subject to many SEC rules that govern U.S.-based companies. Therefore, it reports earnings once a year, six months after the end of its fiscal year.
Following its latest earnings for what it calls fiscal 2000, released earlier this month, Xcelera's shares surged 3 3/8, or 22 percent, to 18 1/2. The company said its net income for fiscal 2000 more than quadrupled over the previous year, to $12.4 million or 11 cents a share.
Potentially confusing investors, the company's actual loss was 6 cents a share, after adjusting for one-time gains. And the company lost a penny a share from continuing operations.
Separately, Alexander Vik, Xcelera's chief executive, faced additional criticism when he sold more than $200 million of Xcelera shares in February -- when the stock was peaking. Adding to the controversy over Vik's share sale is that a reporter from Microsoft's MoneyCentral Website, who was known to own Xcelera shares, had praised the stock in a column in February.
Analysts had little to say about Xcelera and its latest controversy. However, several analysts who cover Xcelera have panned the stock from the start. Luke Fichthorn with Lazard Freres has kept an "underperform" rating on the stock - at least since he started covering it last month.
Fichthorn defended the company on one point: Despite the company's controversies, Xcelera proved to be worthy of analysts' attention, he said.
"I cover Internet holding companies and that's what this company is," Fichthorn said. "I already had picked up coverage of CMGI (CMGI: news, msgs), Safeguard Scientifics (SFE: news, msgs), and Internet Capital Group (ICGE: news, msgs). At the time, the fourth biggest Internet holding company was Xcelera. To ignore it would have been silly."
Fichthorn said he couldn't make additional public comments about the stock.
--------------------------------------------------------------------------------
Mike Tarsala is a reporter for CBS.MarketWatch.com
cbs.marketwatch.com |
