Who Needs Wall Street?
Investors in George Jensen's company could take little comfort from its prospectus. True, the second page did feature photos of Marilyn Monroe, Cary Grant, Grace Kelly, and Clark Gable. But after that, the sizzle died fast. Page four's bleak news: revenues to date were $76,500; net losses were nearly $3 million. Pages six, seven, and eight warned that demand for the product was uncertain, the industry was highly unpredictable, and dividends were unlikely.
None of that mattered, however. Investors oversubscribed to American Film Technologies Inc.'s initial public offering, which raised $3.5 million. That was especially remarkable in view of the timing. Jensen reeled in most of the money right before the stock-market crash of 1987. He successfully closed the offering 10 days after the market crashed and watched the price of AFT's stock double during its first day of trading, October 30.
Someone, you say, did an incredible job flogging this company. You're right. But it wasn't an underwriter or an investment bank. It was Jensen, aided by a hardy band of evangelical fans. He flouted convention by acting as his own underwriter in taking AFT public.
Do-it-yourself IPOs are rare, with good reason. For one thing, if such self-help financing doesn't succeed, a company won't raise any money. A traditional underwriter, of course, guarantees the cash. Also, self-underwritten stocks may not get brokerage firms' attention, which is important for creating a healthy aftermarket. Finally, new developments on the trading exchanges are making it tougher for any new company to get itself listed. (See "The Elusive IPO," page 2.)
Still, Jensen's experience proves that with luck and a lot of salesmanship, business owners can manage their own IPOs. More important, it illustrates the enormous payoff in getting personally involved with prospective investors in a financing, even if you've hired one of Wall Street's top guns. Investors weren't scared off by AFT's prospectus, because they had gotten to know Jensen.
The personal connection was critical to Albert Voehringer, who owns several businesses in Wayne, Pa., where AFT is located. "I was close by. I would visit the company on a weekly basis," he recalls. Eventually he bought 400,000 shares, nearly 2% of AFT's outstanding stock.
Of course, Jensen had two advantages that would be hard to duplicate: seven years' experience as a stockbroker, and a very sexy business -- coloring old black-and-white movies. Launched in 1985 as an independent film-production house, AFT changed course a year later, when Jensen decided to try to develop colorization technology.
AFT progressed briskly, coming up with a prototype colorization process only seven months after it began its research-and-development effort. That led Republic Pictures to grant the company a $600,000 contract for two movies. All AFT lacked was the money to buy the equipment and hire the people to fulfill the contract.
Traditional sources of capital, including an underwriting firm and a venture capital group, were skittish about sinking cash into AFT. They worried that the company had only one customer, had no track record, and faced an untested market.
Jensen ruled out raising capital himself through a private placement. He had already done that once, collecting $3 million from 240 investors who were accredited, or had met stringent tests of their financial standing. "I turned the country upside down to find those 240," recalls Jensen. He thought it was too soon to expect them to dole out more cash. "We had no choice but to do an IPO." Here's why it succeeded:
* Shareholders as cheerleaders. Jensen first enlisted AFT's eight managers to act as "brokers" by telling their friends and acquaintances about the company. But it quickly became apparent that AFT's 240 shareholders were an even more effective sales force. When Jensen invited them to a viewing of five-second colorized clips, he expected only about two dozen to show up. One hundred fifty did. The viewing room buzzed with excitement.
Jensen worked hard to stoke that excitement by keeping shareholders abreast of all developments. Many shareholders, in turn, bought more stock in the IPO and told their friends about the company. Jensen says, "One well-known millionaire had 50 of his friends invest."
* Professional connections on the cheap. One of Jensen's breakthroughs was winning the confidence of Pete Kapourelos, a vice-president and stockbroker in the Westchester, Pa., office of the brokerage firm Advantage Capital Corp. Kapourelos not only persuaded Advantage's Dallas headquarters to give him limited approval to market AFT's stock -- out of his office only -- but also offered Jensen the use of Advantage's meeting rooms. Once or twice a week, Kapourelos and Jensen treated 30 to 40 people to a few drinks, a showing of a colorized Casablanca or Boom Town, and a short presentation on AFT. Kapourelos, who says he has more than 3,000 clients, ended up selling some 290,000 of the IPO's 3.1 million shares for a 10% commission. Total cost to AFT: $29,000.
* Savvy filing. Jensen had persuaded Art Hartel, an experienced securities lawyer who had been his personal attorney, to join AFT full-time in December 1987. Hartel prepared a red herring, a preliminary prospectus that AFT filed with the Securities and Exchange Commission. The SEC requires that a red herring be distributed before a company can begin talking with potential investors.
Hartel elected to use an S-18. An S-1 filing, which allows a company to raise an unlimited amount of money, calls for the most exhaustive disclosure of information. Form A is more abbreviated but allows a company to raise a maximum of only $1.5 million. The S-18 falls in the middle and allowed AFT to raise up to $7.5 million. Because it was filed with a branch of the SEC, rather than with headquarters, it was speedier, too.
* Market support. For AFT's shares to perform as well as possible after the IPO, Jensen persuaded the Philadelphia Stock Exchange to waive three of its listing requirements: profitability, a minimum net worth, and at least five years of operation. Hartel says, "If we had to wait five years to qualify, we'd still be struggling to get the capital to do what we've done with the company."
* Fast rewards for new shareholders. If you hired an underwriter to take your company public and watched the stock price double on the first day of trading, you'd be fuming because the underwriter left too much money on the table. In a self-underwriting, though, it's a different story. Jensen thought a $1 share price would be irresistible to investors. Others at AFT argued for a higher price, but Jensen didn't want to risk failure with his one shot at getting capital. And he wanted to please shareholders with quick appreciation, in case he needed to issue more shares later.
* Negative publicity. Jensen capitalized on a controversy about the aesthetic merits of colorization. The criticism gave him a chance to describe AFT's technology while explaining how his company wasn't altering the original negatives.
Even though that publicity was free, Jensen decided to hire a Chicago public- and financial-relations firm, Massey, Wheeler & Associates Ltd., just after the offering. For $2,500 each month, the firm has helped AFT write quarterly reports, issue press releases, and promote itself to Wall Street firms. One of the key contributions that Massey, Wheeler & Associates made was an introduction to Bateman Eichler, Hill Richards Inc., a well-known Los Angeles brokerage firm, which assigned a securities analyst to follow AFT's stock. That, of course, has increased interest among investors even further.
Jensen's IPO yielded rich returns well beyond the $3.5 million it raised. Investors in the IPO watched the share price zoom from $1 to a high of $14 in June 1990, following a one-for-two reverse split. For Jensen, the IPO allowed AFT to capture virtually all of the colorization market, invest in new technology for animated films, and raise still more money in a second stock offering.
Now the man who had trouble getting even a small-fry investment bank interested in bankrolling AFT is enjoying one of the ironies of success: Morgan Stanley, one of the premier firms on Wall Street, jumped at the chance to take on George Jensen's latest assignment -- finding a merger partner for AFT.
THE ELUSIVE IPO
Going public is getting tougher
After a lengthy investigation into penny-stock fraud, the Securities and Exchange Commission is encouraging the stock exchanges and the National Association of Securities Dealers to raise their standards. The SEC has also suggested that they should no longer waive listing requirements -- a reform that, if instituted, would have made AFT's listing on the Philadelphia Stock Exchange impossible. Here are the pending changes in listing standards on the NASDAQ system:
Total assets $2 million $4 million
Stockholders' equity $1 million $2 million
Market value of publicly No requirement $1 million
Minimum share price No requirement $3 million
Going Public: Practice, Procedure, and Consequences by Carl W. Schneider, Joseph M. Manko, and Robert S. Kant is a comprehensive, heavily footnoted description of the legal and regulatory requirements involved in going public. And it's free. You can request it from the Director of Publications, Bowne & Co., 345 Hudson St., New York NY 10014, (212) 627-1900.