And now, direct to the public....

Offering a direct stock-purchase program may get investors to sit up and take notice, but don't forget to count in the cost of additional shareholders.

In 1993, the management of DQE, the holding company for Duquesne Light Co., faced several issues: a declining shareholder base, weak investor recognition outside the company's immediate vicinity and a lower stock price than its financial success warranted. To address these concerns, DQE took what was, at the time, a relatively uncommon step: It amended its dividend reinvestment plan to permit first-time investors to invest directly.

For the company, the results have been impressive. More than 6,000 new individuals, who now own a total of 350,000 shares, have invested through the plan. Plus, these investors have contributed more than $8.4 million in optional cash investments alone, proving the company's theory that a direct-purchase program would draw the kind of long-term, growth-oriented investors it sought. And, at a time when utilities have suffered significant blows to their stock prices, DQE's has held steady and even risen moderately during the past two years.

Share-purchase programs have abounded for years in the form of dividend reinvestment plans. More than 950 companies offer these plans, allowing investors to purchase stock, often commission-free, through reinvested dividends or optional cash purchases. Until now, however, first-time stock purchases have been left to brokers.

Opening up a company's direct investment program to nonshareholders, whether employees, customers or the general public, has always been possible in theory. But the arduous filing and approval process the Securities and Exchange Commission required could take anywhere from 12 months to two years to complete, so many companies passed on this option.

In December 1994, the SEC communicated a set of guidelines for selling stock directly to the public, dramatically shortening the time needed for approval. Now companies adopting open-availability programs that comply with the SEC's stated parameters can implement their programs much faster, typically in three to five weeks, a development that's paving the way for individual-investor participation. That's good news even for companies like DQE, which has already braved the individual filing process.

In most cases, the SEC assigned expiration dates to the open-availability programs of companies that had registered before December 1994. After the expiration date, companies had to refile with the commission. Under last December's blanket exemption, issuers whose plans comply with Rule 10b-6 specifications need only notify the SEC of their intention to use the class exemption, saving significantly on time and legal expenses. Also, in accordance with the exemption, companies may shift quarterly between open-market purchases and original-issue share purchases, in which investors buy shares directly from the company's reserve. This flexibility can be extremely valuable as companies' financing needs change.

More than 70 companies now have introduced open-availability programs, and industry consultants have estimated this number will grow to well over 100 in 1996. About a third of these companies currently offer programs that cover the entire United States. The rest are available only to customers or residents of the state or states in which the company operates.

These programs can benefit both the company and individual investors. When investors open an account with a brokerage firm, their shares typically are registered in the firm's "street name" rather than the investor's own name. Investors benefit because they don't have to keep track of stock certificates, they can sell shares with just a phone call and they receive consolidated statements, which simplify record keeping and tax filing.

But street-name ownership has its drawbacks. Since corporate dividend reinvestment plans permit only registered shareholders to participate, some brokers have instituted dividend reinvestment programs. However, they typically charge full commission costs and don't provide for additional cash investments. Transaction costs for brokerage plans also are significantly higher, for example, when selling shares or withdrawing a stock certificate. In addition, shareholders who request dividend checks typically receive them later, since these payments first go to the broker, who then disburses them to the investor.

Investors with street-name ownership have less leverage when it comes to negotiating commissions with their brokers, since one firm holds the shares. And if an investor is dissatisfied with his or her broker, it can take weeks, even months, to transfer shares to another broker. A registered shareholder, on the other hand, can more easily shop around for the best deal and can either have the transfer agent process the sale directly or receive a physical stock certificate to deliver to the broker of his or her choice.

THE BALANCING ACT

For the issuing companies, open availability offers several key benefits. One of the most obvious is the opportunity to increase the number of registered shareholders, creating a better balance between institutional ownership and individual investors. During the past 30 years, the percentage of investors holding registered shares has decreased significantly. In 1965, 84 percent of shareholders were registered in their own names. In 1980, that number had shrunk to 70 percent, and today, only 49 percent of shareholders hold stock certificates.

The reduction in the number of registered shareholders is attributable to several factors, including the popularity of easily accessible vehicles like mutual funds and, more recently, to a push by the brokerage community to gamer new street-name accounts because of a recent regulatory change. In June of this year, the SEC condensed the U.S. trade-settlement cycle from five days to three days following a trade. (This is known as the T + 3 rule.) The result has been fewer paper and far more book-entry, electronic transactions.

The change to a three-day settlement period has affected the institutional side by enabling these investors to more quickly move large blocks of shares in response to company events or earnings announcements. Individual investors, on the other hand, often have adopted more of a "wait and see" attitude to stock ownership. The move to a three-day cycle has accentuated this fundamental difference and convinced many issuers of the value of a balanced shareholder base.

In fact, open-availability programs present a unique customer-relations opportunity. Many companies have used these programs to enhance their name recognition and expand markets. These companies cherish registered stockholders for their brand loyalty, reasoning that the more shareholders they can attract, the stronger their hold on their market. And the greater the link between customer and shareholder, the better the company's relationship can be with both entities.

Open-availability programs also can be an effective and inexpensive way to raise capital for companies that offer investors original-issue purchases. Although open-availability programs naturally have costs of their own, issuing new securities through these plans bypasses the typical underwriting and offering expenses involved. And, because the company is continually raising capital, it can avoid the stock-price fluctuations that floating large secondary offerings often causes. Using original-issue shares can be instrumental in maintaining capital targets without undergoing a public underwriting.

Direct access to shareholders is another advantage of open availability, especially when the company is seeking support for new initiatives. Of course, not everyone in the company may see it that way. While a marketing director for a consumer-goods company may cherish shareholders for their brand loyalty, the corporate secretary of the same company may view registered holders as a source of more work and administrative expense. A board of directors might appreciate individual investors' confidence when it's proposing a controversial proxy issue, but a financial officer must weigh the financial trade-offs in implementing the plan.

How much can you expect to spend on an open-availability program? [TABULAR DATA OMITTED] First, consider the cost that every additional shareholder represents. Annually, each shareholder typically costs $20 to $25, including postage, materials costs and transfer-agent fees, which may account for 25 percent of the total. These fees cover all expenses related to maintaining shareholder records, processing their transactions and performing other shareholder services. While some transfer agents have been able to drive costs down - through volume discounts on postage and materials; automated clearinghouse processing; and optical scanning, processing and investor servicing technology - some portion of these costs is fixed. The increased value of the dividend float offsets this somewhat, as individual investors are slower to cash their checks than institutional holders, all of whom receive immediate electronic deposits.

Institutional investor costs are more difficult to pin down. Disseminating annual-meeting or other shareholder materials through brokers, for instance, is a far more expensive proposition than the direct, discounted postal route to registered shareholders that transfer agents offer. Solicitation firms charge $250 to $500 to distribute "search" cards to brokers; companies or their transfer agents use these cards to ascertain the amount of proxy materials brokers need in order to distribute to underlying holders. Fulfilling brokers' materials requests may cost $1,000 to $3,000, excluding shipping costs, and brokers typically charge issuers 60 cents to 70 cents for each proxy they mail to their underlying holders, excluding postage and stationery expenses.

Additional proxy costs associated with processing broker votes include charges from banks, brokers and Automatic Data Processing (the institutional vote tabulator). Getting votes from brokers in time can be difficult, and since the brokers hold the majority of shares, their response rates may affect quorums. A proxy solicitation to brokers typically costs $5,000 to $10,000, which is often a worthy investment, since emergency solicitations cost much more.

"REMEMBER TO PICK UP YOUR STOCKS, DEAR"

That could become an increasingly common refrain in American
households as more and more companies offer investors the chance to
buy stock directly from them. Here's a partial list of the 78
companies with open-availability programs, according to DRIP
Investor, a Hammond, Ind., newsletter for direct-purchase
investors.

                                       Minimum initial
Direct initial stock purchases           investment

Arrow Financial Corp.                        $300
Bob Evans Farms                              $ 50
DeBartolo Realty Corp.                       $500
Dial Corp.                                   $100
Integon Corp.                                $500
Johnson Controls                             $ 50
Mobil Corp.                                  $250
Pinnacle West Capital Corp.                  $ 50
Texaco                                       $250

Initial purchases only for residents of the state(s) where the
company operates

Bancorp Hawaii                               $250
Central & South West Corp.                   $100
Florida Progress Corp.                       $100
Northern States Power Co.                    $ 10

Initial purchases only for utility customers

Boston Edison Co.                            $500
Brooklyn Union Gas Co.                       $250
Connecticut Water Service                    $100
Minnesota Power & Light Co.                  $ 10
New Jersey Resources Corp.                   $ 25
San Diego Gas & Electric Co.                 $ 25
Union Electric Co.                     No minimum

The costs of open-availability plans fall into several categories. Plan implementation expense is largely a function of legal and printing costs, and adhering to the SEC's December 1994 releases can greatly reduce those costs. Three areas of plan administration account for the majority of costs: processing cash investments, statement mailings and responding to requests for information. On average, the maximum cost of cash investments through a transfer agent is $2.50 per transaction, with commissions of 5 cents per share. This equates to about $7.50 for each 100 shares purchased, compared to the $30 or $40 a broker would charge.

Companies can choose whether they or their shareholders absorb these costs. With postage and stationery expense, statement mailings amount to 32 cents to 35 cents per investor. Fulfilling a request for information costs roughly $2, including postage and materials.

DECISIONS, DECISIONS

Note that the company can tailor the open-availability plan to its needs and financing objectives. Typical features include weekly, biweekly or monthly investments; automatic debits; payroll deductions; gift certificates; individual retirement account components; full and partial dividend reinvestment; and optional cash investments.

Some companies go a step further, picking up all or part of the commission fees and attracting additional investments by offering discounts off the stock price for reinvested dividends. Others have lowered their minimum investment requirements to $20 or $50. These lower amounts are ideal for attracting investors interested in saving for their children's college educations or other specific objectives.

Exxon Corp., for instance, offers a plan geared to be shareholder-friendly. Its open-market program has a weekly investment cycle, automatic debits, gift certificates and an IRA account offered by the bank. Exxon assumes all the program costs, except for stock sales and the fees associated with its IRA component.

Exxon began with 120,000 participants in 1992. Today it has more than 230,000. More than 1.1 million shares, with a market value of over $77 million, are held on behalf of IRA program participants, a 30-percent growth rate in the last 12 months alone.

Deciding whether you want to use an open-market plan, original-issue plan or a combination of the two is one of the first questions to answer when developing an open-availability program. The company's unique investor-relations and financing objectives determine which type is best. For example, while open-market programs can be both effective and simple to implement, they don't directly offer the capital-raising opportunity of original-issue programs, since the funds invested flow directly back to the market.

On the other hand, a company must file its original-issue plan with the SEC. Because it's offering shares to the public, the company must ensure the program complies with blue-sky securities laws in each state and that offering the program would not require registering as a broker-dealer in any of those states. Therefore, to expedite filings for your original-issue plan, carefully review the features of existing, already-approved programs before you design your own. A good transfer agent can help you work through these regulatory and administrative hurdles.

GETTING THE WORD OUT

While the SEC has made it easier for companies to establish open-availability programs, it has tightened the reins on the kinds of advertising it permits. Currently, the guidelines are rather broad and, as more companies implement plans, the SEC will need to further clarify what constitutes acceptable advertising and marketing practices.

For now, an issuer can place tombstone advertisements, but it's limited to a simple announcement and a phone number that interested investors can call for additional information and a prospectus. Blanket mailings to the general public are off limits. But a company can send announcements to affinity groups - any entity with which it has a preexisting mailing relationship, including customers, employees, vendors and existing shareholders. These groups can be a powerful source of word-of-mouth referrals.

Despite some of these advertising limitations, word is getting out, through newspaper articles in local and national papers and investor newsletters. In the two days following a mention of DQE's program in an investment newsletter, the company received more than 1,000 calls from individual investors, a 400-percent increase over typical volumes. It enjoyed a 70-percent sign-up rate from these investor inquiries.

Investor fairs are another effective way to introduce open-availability plans. The National Association of Investors Corp. has more than 200,000 members nationwide and hosts fairs at the local level and a national exposition that draws thousands of individual investors. Many companies set up booths and pass out information to interested investors.

One final caution: In starting a program, understand that the number of shareholders can dramatically increase in a relatively short amount of time. Before rolling out a new plan, make sure you're prepared to handle the additional volume. Open-availability programs can cause unpredictable responses, and certain factors, such as media attention or company announcements, can spike those volumes considerably. Interactive voice-response technology lets transfer agents respond quickly to increasing volumes of shareholders' calls. Training investor-relations staff well on specific plan parameters and having the correct call-tracking and routing technology is also critical to managing these volumes effectively. So is constant communication between you and the transfer agent on any pending news announcements or trends in investor inquiries.

Speaking of investor inquiries, responding quickly to them is extremely important. Investors often act on recent information about a company specifically or the open-availability concept in general. Getting plan information out to investors quickly is important to maintaining high enrollment levels. Once investors have reviewed the materials, it's also crucial for you to promptly answer their questions.

Clearly, the future for open-availability programs is bright. And new opportunities to save time and money are continually cropping up as technology improves. One interesting concept, for instance, is the possibility of posting plan information and enrollment materials on the Internet for investors' convenience and to save on issuers' postage, forms and fulfillment and enrollment-processing costs. These options are likely to interest more companies in taking a look at the benefits of offering open-availability programs, both for themselves and for their investors.

Mr. MacQuarrie is president of Banc-Boston State Street Investor Services in Boston.