It's a business that requires little investment, no fancy machinery or high-tech equipment, and only a small group of workers.
A tool and die shop that also makes components for tennis rackets and towel racks cuts parts out of low-grade materials for minimal cost -- a couple of dollars. Then the parts are shipped to a simple strip mall outside Los Angeles that also houses a sandwich shop, a medical clinic and a tae kwon do studio. There, about 30 workers earning $6.60 an hour quickly assemble the pieces into a popular but lethal consumer product -- the Lorcin L-25 semiautomatic pistol.
The Lorcin, one of the guns most frequently traced to violent crime, retailed for $69, making it the least expensive firearm in the United States in 1997. Wholesalers could purchase it for $28.
The total cost of producing the gun -- parts and labor -- is $10, according to financial documents contained in court filings in Riverside, Calif.
The picture that emerges from the court filings -- which involve one gun manufacturer, Lorcin Engineering Co. -- shows that some gunmakers are able to manufacture hundreds of thousands of weapons with little upfront investment and low costs, and then reap large profits. For many years, some 60 percent of every sale at Lorcin was profit.
In the debate over guns in America, the cost involved in manufacturing firearms is a pivotal issue. Lawyers for the cities and individuals who have sued gunmakers contend that with a few relatively inexpensive additions, guns could be made much safer. Gun companies have resisted disclosing information on manufacturing costs and profits, saying it would reveal trade secrets in a highly competitive industry.
Lorcin is the largest of the companies that sprang up in a circle around Los Angeles after a 1968 law banned the importation -- but permitted the domestic manufacture -- of "Saturday night specials," the inexpensive, easily concealable handguns often used in crimes.
According to the documents and interviews, Lorcin is able to keep costs down by using inexpensive materials and a remarkably simple process to make its guns.
A tool and die shop, for instance, cuts and forms the soft zinc alloy used to make various gun parts, including the frame, the slide and the trigger. (These alloys are cheaper and easier to work with than the high-grade steel used by the makers of more expensive guns.) Another subcontractor makes the steel barrel. Another makes the springs and another the internal parts of the gun and the clip to hold the ammunition, according to Ron Robinson, owner of Roron Die Casting Inc., in Reno, Nev., which made parts for Lorcin for many years.
The subcontractors often use day laborers who are willing to work for minimum wage to make the parts. The parts are then sent to the Lorcin plant, where the employees take the castings from the raw stage, create the slots in them, and assemble and package them.
"Our components are cheap, maybe $2 or $3," said Robinson, who no longer makes gun parts for Lorcin. "They turn it into a firearm. And they make all the money."
James Waldorf and Errol Brown started Lorcin with an investment of $110,000 each in 1988. Only six years after the business was launched, Lorcin's sales were $8.2 million, according to Lorcin's financial statements. In good years, Waldorf and Brown paid themselves nearly $1 million in salary, drove cars leased by the company, traveled in a private plane and spent up to $100,000 on entertainment.
Experts said Lorcin's 60 percent pretax return compares favorably with that of other companies. Thomas J. Lewis, an analyst for C.L. King & Associates in Albany, N.Y., follows companies such as Precision Castparts Corp., a company that makes intricate metal parts for engines. The gross profit at Precision Castparts wouldn't be more than 23 percent in an excellent year, he said.
"That kind of profit," Lewis said on hearing of Lorcin's 60 percent return, "there's something from a financial point of view, something very much amiss there. . . . I'm trying to think of a business that makes those kinds of profits." He couldn't. "That's unnatural," he said.
With virtually every gunmaking company held privately, the cost structure of the gun business has been difficult to ascertain. Only one gun company, Sturm, Ruger & Co., has offered shares to the public and thus regularly reports its earnings. It recorded gross profits ranging from 26 percent to 33 percent of sales over the past three years. Lewis said that Sturm, Ruger's profits sounded reasonable, especially compared with those of a maker of lawnmowers or bicycles.
The Lorcin documents do not indicate the company's tax rate; the top corporate rate for a company of its size is about 35 percent. Sturm, Ruger's effective tax rate in 1998 was 40.5 percent, giving it a net profit of about 20 percent. Precision Castparts has a return of about 10 percent to 11 percent after taxes, Lewis said.
While Lorcin produces a weapon that has sometimes topped the lists of guns traced to violent crimes and makes the cheapest of handguns, its guns appealed to a market that other gun companies had missed. Now, larger, more established gunmakers also are making less-expensive, smaller handguns to compete with the other California companies.
The California handgun companies make products of such low-grade metal that they are a disposal problem for law enforcement agencies. In Sacramento, a local metal foundry that melted the guns with other junk metal refused to accept the guns turned over by the Sacramento Police Department because the cheap alloys in the guns ruined entire batches of material.
Once, the foundry manager demonstrated the problem by putting a torch to one of the cheap guns. "It smoked and then melted," said Chris Hadley, supervisor of the property-management section for the Sacramento police. "It was like magic. It just went poof," he said.
Now, Sacramento's guns are placed inside junked cars and shredded, Hadley said.
Though there are no federal safety standards for guns, there are efforts to impose standards at the state level. The California state Assembly passed legislation last week that would ban the making and selling of what it calls "junk guns" in the state. The bill, which the state Senate is expected to pass and Gov. Gray Davis (D) has said he will sign, would mean that many California gun firms would have to retool and redesign their guns in order to pass new safety standards or move their operations elsewhere.
In 1996, Lorcin filed for bankruptcy protection under Chapter 11 of the bankruptcy code -- not because the business was failing but because it had been inundated with lawsuits from people who alleged they had been injured by poor-quality guns. The company faced 35 lawsuits and $32 million in claims at the time.
The combination of product-liability lawsuits and the suits filed by various cities are expected to send more gun companies to courthouses to seek bankruptcy protection. This spring, Davis Industries, another California company that makes cheap handguns, filed for bankruptcy protection, and at least two other companies are expected to follow suit soon, according to industry sources.
One of the main issues raised by creditors in the Lorcin bankruptcy case was whether the company was using the ability to reorganize its operations under the bankruptcy code as a way to avoid paying large sums to plaintiffs if it lost the suits. "Their filing Chapter 11 doesn't mean they're going broke," said Alan Stomel, the bankruptcy lawyer who represented creditors in the Lorcin case. "They're successful companies using bankruptcy as a shield to put a stop to the legitimate claims of individuals and cities."
In bankruptcy, Lorcin was able to settle its lawsuits for pennies on the dollar -- about $1.2 million, according to Robert W. Pitts, Lorcin's bankruptcy attorney. It was during the litigation surrounding the bankruptcy case that Lorcin filed little-noticed documents about its business practices and profits. Lorcin emerged from bankruptcy last year.
Waldorf and Brown did not file for personal bankruptcy protection, only protection for their company. When Waldorf divorced his wife of 28 years in 1997, he listed among his assets two homes in swank areas outside Reno worth $1.8 million; a Mercedes, a Porsche and a Jeep Cherokee worth a combined $156,000; and "the lowest-mileage DeLorean in the world." He did not estimate its value, saying the rare car, with only 60 miles on it, was for his grandson's college tuition.
In 1994, Waldorf and Brown paid themselves $925,000 each; in '95, $668,750 each, according to bankruptcy documents -- though a tax return filed with his divorce documents listed a $541,000 salary that year for Waldorf. The year Lorcin filed for bankruptcy protection, 1996, their salaries were $700,000 each, according to court documents.
Experts for Lorcin told the court that Lorcin's executive salaries were in line with those of other officials of the other California companies. In 1996, Bruce Jennings of B.L. Jennings was paid $1.6 million, or 25.8 percent of sales of $6.2 million. Jimmy Davis of Davis Industries was paid $800,000, or 25 percent of his company's $3.2 million in sales.
Waldorf, 50, never finished high school, but he is outspoken about his prowess in business. He even wrote a book called "Landing on Your Feet," advice to those who've lost their jobs. He did not return phone calls requesting an interview.
Asked during a legal proceeding why he went into the firearms business, Waldorf had a ready answer: "As measured by its return on investment and risk-reward ratio, it offered the best opportunity. . . . I'm a capitalist. I enjoy making money."
CAPTION: MAKING SATURDAY-NIGHT SPECIALS (This graphic was not available)