Living With the Past

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Living With the Past

Machine-tool manufacturer has breakthrough business and a problem

By ANTHONY PALAZZO

Staff Reporter





David Duquette has a great story.

His publicly traded New Century Cos. takes massive, obsolete machine tools, tears out their guts and rebuilds them with state-of-the art components. The machines, which are used to make components for jet engines and power turbines, undersell foreign models by hundreds of thousands of dollars per unit.

“The Japanese beat me in an early part of my career. I’m turning around and socking it to them,” said Duquette, who is chairman and president of the Santa Fe Springs company. “They can’t compete.”

It’s a claim few American manufacturers can make, and a rare bright spot in a U.S. machine-tool industry that’s become nearly extinct over the past three decades. Duquette wants to use his bulletin-board-traded stock to buy small aerospace manufacturers and build parts in Mexico using cheap labor and his inexpensive machines.

But before investors get carried away, they will have to come to terms with the delicate matter of Duquette’s past.

Back in 1984, he and an associate pleaded guilty to obstruction of justice and violating federal securities laws, admitting they falsified the books of Numex Corp., a publicly-held machine-tool company Duquette ran. He went to jail for five months. The operating unit of that company, U.S. Machine Tool Inc., filed for bankruptcy in 1982. He also settled charges brought by the Securities and Exchange Commission by signing a consent decree in which he didn’t admit or deny guilt.

He doesn’t exactly hide his past, but he doesn’t volunteer it either. In interviews, he brought up the connection with Numex, but didn’t mention his brushes with authorities until a reporter discovered them. A large New Century investor contacted was not aware of his run-in with the law, nor was a potential merger partner.

SEC rules don’t specifically require disclosure of transgressions so far in the past. But it is a judgment call, and Duquette’s failure to volunteer these incidents raises questions. “Any competent and reputable attorney is going to say, you’ve got to disclose this,” said Irving M. Einhorn, a securities attorney and former head of the Los Angeles SEC office.

But Duquette said investors could “absolutely” trust him with their money this time around.

“People make mistakes, things go wrong,” said Duquette, who is now 57. “I made a mistake at the time and I paid dearly for it.”

Duquette, who had been president and chief executive of Hartford, Conn.-based Numex, was accused of setting up a clandestine bank account, funneling more than $2.7 million in customer payments into it, and making false entries on the company’s books to hide the diversion. He and his associate, company treasurer Willam Laskarzweski, fraudulently verified the false entries after intercepting a letter Numex’s accountants sent to its bank, the government charged.

Blames bankruptcy attorney

Duquette admits that he set up the bank account so Numex would retain some cash after the bankruptcy filing. The secret account, he said, was the idea of a bankruptcy attorney, and had the result of showing accounts receivable on Numex’s books when the payments had in fact been collected.

Duquette didn’t address other details of his activities, which occurred in 1980 and 1981. “That was 20 years ago, and my attorneys gave me very bad advice,” he said. He said he pleaded guilty in the criminal case so he wouldn’t be prosecuted for additional charges, including mail fraud.

Numex closed its machine-tool operation in the late 1980s. Duquette attributes the company’s failure to illegal dumping by the Japanese. The machine he was selling for $80,000 was a horizontal turning lathe with computerized controls, part of a new generation of equipment that was more accurate than its manually operated predecessors. Such a lathe could be used to make all manner of metal parts, but the Japanese were selling a comparable machine for $50,000, Duquette said.

Many in the machine-tool industry protested what they considered to be illegal Japanese subsidies of its companies. Eventually, Japan agreed to voluntary limits on machine-tool exports, from 1987 to 1993. By then it was too late. “The machine-tool industry was wiped out,” Duquette said. Now the industry is dominated by Japanese and European manufacturers, and only a handful of American companies are active.

Numex then went through a number of incarnations with different owners. In the early 1990s, it was selling a hand-held massage device called Therapy Plus via infomercials. The Federal Trade Commission forced the product off the market for a time until it could substantiate its claims of effectiveness. When it was re-launched, sales faltered. In 1999, a new group took over the corporate shell to launch internetmercado.com, a Spanish-language e-commerce site. It ceased operations in February 2001.

Return to Numex shell

Duquette, meanwhile, went on with his life, working for another machinery re-manufacturer after his release from prison. In 1995, he started New Century with a plan to recycle huge, obsolete lathes, called vertical turning lathes, that were sitting unused in junkyards and on shop floors. In May of 2001, he merged New Century into the dormant Numex shell, transforming it into a public company. “I put my company back in the same shell that I had already taken public, 20 years earlier,” Duquette said.

Vertical turning lathes are made to handle parts so big they can’t be made on a standard horizontal lathe. They turn vertically, on a spindle that resembles a humongous potter’s wheel.

On the older machines, built in the 1940s, 50s and 60s, the lathes were operated by hand. But by the late 1960s, computerized machines began to take over. Computerized lathes can make cuts to greater precision and consistency. As a result, parts can be made for jet engines, for example, that spin at 10,000 revolutions per minute without wearing out prematurely.

Today, the cost of building a new VTL in the U.S. is prohibitive. The raw cast iron runs $1.50 a pound, and a large machine can weigh 100,000 pounds. Japanese and European manufacturers have access to cheaper cast iron from China or Eastern Europe. Duquette solves this problem by acquiring older machines for perhaps $20,000 and modernizing them. On a high-end machine, New Century claims to save its customers about $700,000, nearly half the competitors’ price.

Duquette said the heaviness of the older frames produces a better machine than a new one, because it’s more stable. Some customers agree. “You take the old and blend it with the new and you come out with a machine tool that’s outstanding,” said Larry Walker, plant manager of TCI Precision Metals in Gardena.

New Century has refurbished two duplex milling machines smaller than VTLs for TCI Precision, and built another one from scratch. Walker paid $125,000 for each of the older machines, versus a price of $300,000 new. “Today in the machine tool industry, for the most part they’re trying to cheapen the whole thing, so when the machine goes bad, you just throw it all away.”

Little competition

There are a handful of U.S. companies doing work similar to New Century’s, but Duquette seems to have put together a one-size-fits-all method that can cheaply retrofit any of the older machines made by scores of companies in the age of Big Iron.

“I know of at least one other place that would do that, but they don’t do it for the price that New Century would,” said Glenn Neal, manufacturing engineer with Georgia Iron Works in Grovetown, Ga. Georgia Iron Works makes large pumps for the mining industry and dredging harbors. It turns parts that weigh up to 20,000 pounds on New Century VTLs. “New Century’s machines are really reliable and easy to work on if you have to work on it,” he said.

Duquette said New Century is profitable and had sales of about $8 million in 2001. (In 2000, the company reported a loss of $395,075 on sales of $7.4 million.)

Last June, the company signed a merger agreement with one of its customers, Smith West Inc. of Tempe, Ariz. The decline in commercial aerospace demand post-Sept. 11 put that deal on hold, said John Mohnach, president of Smith West. He doesn’t know if it will go through.

Even if the market improves, however, there is still the question of Duquette.

Mohnach, the prospective merger partner, said he had heard rumors about Duquette’s past, but never knew Duquette went to jail until a reporter told him. An investor in New Century, who inherited shares via a previous loan to internetmercado, said he knew nothing of Duquette’s troubles either. “Obviously,” he said, “I’ll have to look into it.”

Technically, transgressions such as Duquette’s need only be disclosed in the five years after they occur, said SEC spokesman John Heine. However, Heine noted, “In addition to anything specific in our rules, there’s also an overarching responsibility to disclose any material information. There’s some judgement involved even in the application of these specific rules.”

Determination of whether to make such a disclosure is up to the subject and their lawyer, Heine said.

Einhorn, the securities lawyer, said he would tell any client who came to him in such a circumstance to disclose it. “I would tell him that I know what the technical rule is, and if everybody makes money, you’ll never hear a peep about this,” he said. “But if this thing blows up on us, people are going to say, ‘If you only would have told us about this, we never would have invested.'”

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