Starting business

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BENJAMIN MARK COLE

That Los Angeles remains the capital of the junk-bond world both in terms of money managers and research was underlined last week by events at Dabney Flanigan LLC.

The Century City-based financial shop had crowing rights after telling investors in print more than a year ago to snap up distressed bonds of certain “wireless cable” companies, such as CAI Wireless Systems Inc. in Albany, N.Y.

The bonds had been eschewed by most investors as IOUs from over-indebted companies that couldn’t make money on an operating basis. But the wireless spectrum became a hot commodity when the big boys of telecommunications the Sprints and AT & Ts; decided that wireless cable rights, which allow two-way communication of Internet and other digital signals, were worth buying as a way to reach local customers without going through a regional Baby Bell.

As a result, wireless cable company bonds that were worth less than two dimes on the dollar last April (the date of the Dabney Flanigan report) have reflated to near full value now, allowing the firm to score handsomely for itself and clients.

“The evaluations worked out much higher than even we originally expected,” said Neil Dabney, founder and managing director. “It was a combination of being smart and lucky for us.”

Dabney Flanigan is up to 25 employees, from just two when launched three years ago, and it has run out of space in its New York office. “I don’t want us to grow past 50 (people),” said Dabney. “I don’t want to be in the people-management business. I just want to be a boutique.”

Maybe so, but he keeps hiring. Dabney recently grabbed Chris Monk, head bond trader at San Francisco-based brokerage Van Kasper & Co., to lead high-yield bond trading.

Dabney believes Monk will find the action fast and furious. Increased flightiness on Wall Street is creating lots of opportunities for distressed bond investors.

“You are seeing V-shaped bottoms” in the values of bonds in such varied sectors as oil, retailing, health care and technology, Dabney said. “Oil was an example. Oil prices had dropped last year, pushing many oil bonds way down. But when oil prices rose this year, those bonds have suddenly come back to near full value. We didn’t have our research done in time to take advantage of it. Nowadays, you have to move quickly.”

Bonded Motors revs up?

There is good news and bad news on Bonded Motors Inc., the small-cap engine rebuilder based in South Los Angeles.

The good news is that Bonded recently secured $5.1 million in financing for plant expansion through a tax-exempt industrial development bond, engineered in part by Growth Capital Associates, a Santa Monica-based advisory firm. A state agency will float the bond.

The bad news is that the company reported a loss of $270,265 for the three months ended March 31, compared with net income of $205,694 for the like period a year ago. Revenues for the quarter were $9.8 million vs. $8.5 million.

The new financing will allow Bonded to expand production at its plant in South Central, adding an expected 200 workers. Bonded has grown substantially in the last two years, reporting $38.1million in revenues in 1998, compared with $18.6 million in 1996.

But the growth has not made shareholders happy. The company has struggled with “engine returns” and other nagging management oversight problems, and profits have turned into losses. The stock has slipped from a high of more than $12 a share in mid-1997 to $3.37 in trading last week. Company insiders have been selling stock.

The company says it’s trying to solve quality and other problems causing the returns, a task that lowered output in the first quarter. The lower output, however, increases overhead costs per engine, thus depressing profits.

Many returns are not caused by quality problems but rather by customers ordering the wrong engine, which is easy to do given the plethora of autos on the market. Additionally, some large retailers order engines in bulk and then kick back the unsold engines.

Quick takes

The National Association of Securities Dealers is alleging fraud in the offer and sale of securities against Dennis Riggi, president and sole owner of Los Angeles-based broker-dealer General Markets Growth Corp.

Riggi sold 50 customers a total of $450,000 in private, convertible stock in an entity called the Pacific Acquisition Group Inc. According to the NASD, Riggi disclosed to customers that he collected a 10 percent commission, plus 5 percent in expenses, on funds he raised on behalf of Pacific Acquisition Group.

But the NASD alleges Riggi actually received a 15 percent commission and 5 percent in expenses. The association is seeking payback of funds from Riggi and restitution for investors.

General Markets Growth Corp. is no longer a member of the NASD, and Riggi could not be reached for comment. An NASD hearing is pending

For a while, the “Dow Dogs” theory of investing has been gaining favor. Under the strategy, investors buy the worst performing 10 Dow Jones Industrials stocks at the end of each year and hold them for 12 months. Less noticed for the past several years has been a tactic by Morningstar Inc., the Chicago-based mutual fund ranking service, recommending that investors buy into the three least popular mutual fund categories of the preceding year, judging by outflows.

The strategy is working in 1999: Last year, investors fled specialty-natural resources along with Latin American and Pacific/Asia funds. This year, funds in those categories have appreciated by an average of 24.6 percent, 28.2 percent and 20.5 percent, respectively.

“We look pretty smart,” said Olivia Barbee, managing editor of Morningstar FundInvestor.

Contributing Reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].

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