A Case of Jitters for Initial Offerings : Trading: Companies joining the rush to go public now find themselves in a tough, crowded market where buyers are selective, prices volatile.


When Day Runner Inc. started selling its stock to the public this year, it had every reason to feel confident.

Its profit history was sound--four consecutive years of earnings gains. And it dominated the market for its product: paper-based personal organizers.

On March 11, the Fullerton-based company offered its stock at $15 a share, a price above the company's original expectations yet not prohibitively high for small investors. Four months later, however, the company's stock has fallen below its offer price to $13.25 a share

Company executives say they are a bit confused: They have had no internal disputes, made no dire forecasts. And first-quarter earnings were up 24%.

Day Runner has met the same fate as other companies that began public trading this year, especially those on the NASDAQ market. A new year's boom in stocks of companies rushing into the market has slowed to a crawl, and 1992 is not living up to expectations that it would become a record-breaking year for initial public offerings, or IPOs.

As for Day Runner, it finds itself in a tough, crowded market where buyers are selective. These new companies find that their share prices are volatile, as the stock often is thinly traded and can be tied to the whims of just a small number of institutional investors.

"The stock's been trading all over the place," said Mark Vidovich, Day Runner's chief executive. "Why does the market do what it does? The heck if I know."

What a difference a few months make. Earlier this year, stock investors were jumping at the chance to turn a profit on IPOs. In the first quarter, seven companies based in Orange County had taken the leap, compared to 11 for all of 1991. And many companies began trading at prices well above their own expectations.

Companies across the nation were doing the same thing. By midyear, more than 300 corporations had gone public, compared to only 130 in the same period a year earlier, according to Sutro & Co., an investment banking and underwriting firm in Los Angeles. In California, 57 companies went public, compared to 30 in the same time a year earlier.

"There was kind of a feeding frenzy in the first quarter," said Stephen Koffler, executive vice president of Sutro & Co. One company would jump in and get a high valuation for its stock, he said, then another would see that success and do even better.

Fueling the frenzy was a bull market on Wall Street and tight bank credit, which dimmed the likelihood of securing a loan. Companies turned to Wall Street as a source of funding for expansion as well as to retire debt, giving up their privacy for the opportunity to raise cash. In that way, original investors and venture capitalists could realize a profit while still keeping an ownership stake.

"There are a lot of companies that went public that didn't need to," said Steve DeLuca, director of research at Cruttenden & Co. "They saw the valuations and said: 'Let's Go!' I don't blame them. When you can just pile cash up, why wouldn't you do it? You got an opportunity you might not see for another two years."

The bulk of those IPOs came in the first three months of the year. The rush peaked in March, when 19 companies went public in California, nearly a third of those in Orange County. By mid-June, however, the pace had dwindled considerably to only half a dozen in the state, and just one in Orange County.

"There was just too much up the pipeline," said Kenneth Dennard of Morgen Walke Associates, an investor relations firm in San Francisco. "You just knew it was going to come to an end."

The reason: Investors grew jittery about the market, and the new kids on the block were the first to take a tumble. Of all the Orange County companies that have gone public this year, only one, Catalina Marketing of Anaheim, is now trading at a higher price per share than at its initial offering.

"Our timing was impeccable," said Joseph P. Proctor, the company's senior vice president for finance. "I'd like to take a lot of credit for it, but I think we were lucky. We've weathered the storm pretty well."

Catalina, which operates an in-store electronic marketing network at supermarket checkout lines, began trading on March 26 at $20 a share, raising nearly $14 million. It is now trading at $25.13.

Why has Catalina done well while others have not?

Investors "sell what they can sell, or they make very arbitrary decisions," said Richard Smith, chief underwriter at Montgomery Securities in San Francisco, which took Day Runner public. "It's hard to find a sector that is immune to the malaise in the new-issues market."

One of Kenneth Dennard's clients, Enhanced Imaging Technologies Inc. in Irvine, is just the kind of company that investors have been shying away from lately: newly public and biotechnology. The company, which makes specialized films for hospital laboratories and screen filters for computers, went public on March 3 at $12 a share. Now it is down to $10.

"We can't get anyone to look at (Enhanced Imaging) because analysts already have stacks and stacks of IPOs on their desk," Dennard said.

The problems with new biotechnology stocks were underscored one day of trading in late June, when it was, as Dennard puts it, Enhanced Imaging's turn at the guillotine. Apparently one portfolio manager wanted to dump all health-care stocks. Because Enhanced Imaging was young and thinly traded, few buyers were interested, and its share price dropped nearly $1 that day.

"There didn't have to be negative news," Dennard said.

The end of the boom for new offerings was not a surprise. Abbey Healthcare Inc., a provider of home health-care services, sensed a glut of offerings coming. The company, based in Costa Mesa, made the final decision at the end of January to go public. The offering took place just a month later at $12.50 a share, and the company raised $36.5 million. The stock now trades at $11.25.

"We knew the window was closing, so there was a sense of urgency to move fast," said Michael C. Miller, chief operating officer of Abbey Healthcare in Costa Mesa. "We just got in under the wire. Now there's an oversupply. Everyone's kind of . . . waiting for an opening. There just isn't the enthusiasm for health care that there was six months ago."

Not all companies got in soon enough to get the valuations they wanted.

Imperial Credit Industries Inc., a Newport Beach mortgage banking subsidiary of Imperial Bank of Los Angeles, went public on May 18 at $8 a share, raising $17.1 million. It now trades at just under $13.

"The first quarter would have been better," Chairman H. Wayne Snavely said. "The pricing would have been better, but we had a good story to tell. We are happy it hasn't gone down (that much). We were lucky in that regard."

The company decided to go public in November after having seen the stock of another mortgage bank, Countrywide Credit Industries in Pasadena, zoom upward after it sold additional shares twice during 1991. But the appeal of mortgage banks, like that of biotechnology and health care firms, has since diminished in the eyes of investors.

"It is a buyers' market," Snavely said. "The buyers, particularly the institutional buyers, dictate the price as much as the company doing the offering. You have to bite the bullet. You sell as little stock as you can at this price, which is what we did."

Some analysts see the shaky market for young stocks as a chance to buy shares of quality companies at bargain rates. In fact, Day Runner looks even more attractive than when it was first offered because it has since introduced new software products, said Seth Feinstein(cq), a senior analyst with Crowell, Weedon & Co. in Los Angeles.

"You couldn't buy it at this price three months ago," Feinstein said. "We're finding all kinds of good stocks at bargain prices. All of these companies have great balance sheets, but they are trading like they are nearing bankruptcy."

Only one company in Orange County has gone public since mid-May. Regency Health Services Inc., a Newport Beach operator of nursing homes across California, started selling shares at $6.50 on June 26. The price has remained about the same.

"We thought the timing was right," said Carol Mays, Regency's chief financial officer. "I suppose anyone would always rather have a better price. But it is what it is."

Regency went ahead with its IPO, but other companies have been postponing their offerings indefinitely. Smith of Montgomery Securities said some analysts are predicting that new public offerings will pick up after Labor Day. But he doubts that.

"The market will get better when it gets better, not when a calendar day is flipped," he said.

And the timing must be right for the company as well as the market. MicroProbe Corp., a Garden Grove firm studying ways to use DNA molecules for disease identification, considered a public offering early this year but decided to stay on the sidelines.

"No matter how good the market is, it has to be a good time for the company," said Greg Sessler, MicroProbe's chief financial officer. "The public markets are not very forgiving when mistakes are made or expectations are not met."

Ups and Downs of IPOs

IPOs have enjoyed an on-again, off-again romance with Wall Street. IPO proceeds hit a dramatic high in 1987. But after a market crash that October, both revenues and the number of companies going public declined more than 50% in 1988. Offerings picked up last year; nationwide, there were 113% more IPOs in 1991 than in 1990 and an almost 300% increase in revenue. Nationwide 1992*: Proceeds (in billions): $17.7 1992*: Number going public: 292 California 1992*: Proceeds (in billions): $1.87 1992*: Number going public: 61 * Totals through June Note: Number excludes closed-end funds; proceeds do not include deductions for commissions and fees.

IPOs Golden in California

Last year, one in seven American companies going public did so in the Golden State (79). Southern California Versus . . .

Last year, there were 79 IPOs in the state, with 62% of those companies premiering in Southern California: County: % Los Angeles: 30.3 Santa Clara: 15.2 Orange: 13.9 San Diego: 12.7

San Mateo: 10.1 Alameda: 7.6%Rest of So. Calif.: 17.8 Rest of No. Calif.: 12.7 . . . Northern California

But if the first six months of this year are any indication, the tables may have turned. Northern California has more than half of the state's IPOs so far: County: % Santa Clara: 27.9 San Diego: 18.0Orange: 14.8 Los Angeles: 11.5 Alameda: 9.8San Mateo: 4.9 Rest of So. Calif.: 21.3 Rest of No. Calif.: 19.6

New Kids on the Block

In the first six months of this year, nine Orange County-based companies tendered IPOs--initial public offerings. Three were technology stocks, three health care, two consumer goods or marketing; and one company is involved in mortgage banking. The combined IPO revenue of the nine companies topped $143 million. Abbey Healthcare Group Inc., Costa Mesa * Date of IPO: Feb. 28 * Market: NASDAQ * Ticker symbol: ABBY * Underwriter: Dillon, Read & Co. Inc. * Shares offered: 3.3 million * Net proceeds: $32.6 million * Initial stock price: $12.50 * High: $14.50 * Low: $9.50 * Friday's close: $11.25 Enhanced Imaging Technologies Inc., Irvine * Date of IPO: March 3 * Market: NASDAQ * Ticker symbol: EITI * Underwriter: Prudential Securities Inc. * Shares offered: 1.6 million * Net proceeds: $14.5 million * Initial stock price: $12 * High: $12.75 * Low: $6.75 * Friday's close: $10 Day Runner Inc., Fullerton * Date of IPO: March 11 * Market: NASDAQ * Ticker symbol: DAYR * Underwriter: Montgomery Securities * Shares offered: 1.6 million * Net proceeds: $14 million * Initial stock price: $15 * High: $21.75 * Low: $10.50 * Friday's close: $13.25 Triconex Corp., Irvine * Date of IPO: March 19 * Market: NASDAQ * Ticker symbol: TCNX * Underwriter: Smith Barney, Harris Upham & Co. * Shares offered: 2 million * Net proceeds: $15.1 million * Initial stock price: $13 * High: $21.75 * Low: $8.88 * Friday's close: $13 Satellite Technology Management Inc., Costa Mesa * Date of IPO: March 25 * Market: NASDAQ * Ticker symbol: STMI * Underwriter: H.J. Meyers & Co. Inc. * Shares offered: 1.6 million * Net proceeds: $15 million * Initial stock price: $10 * High: $10.50 * Low: $6.75 * Friday's close: $8.75 Catalina Marketing Corp., Anaheim * Date of IPO: March 26 * Market: NYSE * Ticker symbol: POS * Underwriter: PaineWebber Inc. * Shares offered: 2.2 million * Net proceeds: $9.3 million * Initial stock price: $20 * High: $30.50 * Low: $24.25 * Friday's close: $25.13 ICU Medical Inc., Irvine * Date of IPO: March 31 * Market: NASDAQ * Ticker symbol: ICUI * Underwriter: Sutro & Co. Inc. * Shares offered: 1.3 million * Net proceeds: $11.2 million * Initial stock price: $11 * High: $11.50 * Low: $6.75 * Friday's close: $10.13 Imperial Credit Industries Inc., Newport Beach * Date of IPO: May 18 * Market: NASDAQ * Ticker symbol: ICII * Underwriter: PaineWebber Inc. * Shares offered: 2 million * Net proceeds: $17.1 million * Initial stock price: $8 * High: $13.50 * Low: $7.25 * Friday's close: $13 Regency Health Services Inc., Newport Beach * Date of IPO: June 26 * Market: AMEX * Ticker symbol: RHS * Underwriter: County NatWest Securities Limited * Shares offered: 2.5 million * Net proceeds: $14.3 million * Initial stock price: $6.50 * High: $7.25 * Low: $6.50 * Friday's close: $7 Source: Securities Data Co. Inc.; companies listed; Securities Industry Assn.

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