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Muscling In

Profile of a start-up reconditioner of classic American muscle cars.
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Joseph J. Bianco, founder of American DreamCar Inc., is betting that America is ready for $20,000 reconditioned Mustangs and GTOs

Investment banker Joseph J. Bianco sold his sports-car importing operation to General Motors Corp. in 1987. Confronted by middle age and without a company to play with, the self-admitted auto fanatic was nostalgic. "I owned a '67 Camaro when I was a kid," he moons, "and I loved that car." So using himself as the typical customer, he designed a business that would "bring back cars that were everyone's dream when they were young," he says.

Brisk as the market for classic vehicles was and still is, Bianco found no one doing what he envisioned -- buying up old specimens from the late 1950s, '60s, and early '70s, completely reconditioning them, and selling them by the thousands through licensed dealers. Such a company could breathe life not only into his own beloved Z28, but also into the other whimsically gewgawed muscle cars beloved by baby boomers -- GTOs, Chargers, Mustangs, Road Runners, even Cadillacs, each a powerful (250-horsepower on up) representative of the country's last great automotive era.

On that premise, in November 1988 American DreamCar Inc. (ADC) was formed. But authentic restoration, because it's so hopelessly slow and expensive, was left to romantic purists. American DreamCar's coldly commercial version restores the aged hulks on an assembly line, a half dozen at a time. Costs are kept down by standardizing parts, and profits kept up through systematized production. That way, Bianco figured, margins should come in above those of today's new machines -- way above, once economies of scale kick in.

The challenge of kicking in those economies before the money runs out has fallen to an industry lawyer named Robert Gil Seasonwein, first enlisted by Bianco to check out the legal ramifications of selling reconstructions on a like-new basis. The idea wouldn't be feasible if the cars' reconditioned but nonetheless old motors had to meet emissions regulations for new cars or if their battering-ram chassis had to comply with current safety standards. Nor would it do if, starting out under another's brand name and still looking very much like it, a product labeled American DreamCar got ensnared in trademark and fair-use bickering. When Seasonwein came back in favor of proceeding, Bianco hired him to do just that and faded into the background as the company's chairman and largest shareholder.

Spurred by $1.75 million in seed capital that Bianco's initial equity placement coaxed from a handful of believers, CEO Seasonwein searched for manufacturing facilities. He settled on Cleveland, where in August 1989 American DreamCar moved into 29,000 square feet of leased factory space. Although other cities had cheaper real estate, none proffered Cleveland's main lures: local suppliers and inexpensive skilled labor. Last July, ADC was employing some 20 skilled laborers at an average wage of about $14 an hour. If paying salaries of $30,000 a year sounds untenable to manufacturers in other industrial areas, doubters should note that ADC's first help-wanted ad for auto-shop specialists drew 60 inquiries, and the company has not yet found it necessary to run a second.

The finished ADC product, although unabashedly a rehab, boasts not only a body that is identical to the original (accompanied by original title) but also an engine that outperforms it. In fact, argues Seasonwein, who worked his way through law school as an auto mechanic and car salesman, a DreamCar is likely to be reassembled more precisely in Cleveland than it was originally assembled in Detroit. That's one justification for showroom stickers that range from $19,995 to $27,995, of which ADC receives three-quarters.

After a muscle car is acquired, it is eviscerated. The engine it arrives with is sometimes reconditioned, but most often unceremoniously junked and replaced with a one-size-fits-all Chevy 350 -- no Schwarzenegger, but acceptably brawny nonetheless. Its transmission, suspension, brakes, shocks, steering box, and other mechanisms are likewise gutted and modernized. It is given tires, a sound system, and air-conditioning; each model's decorative kitsch is authentically revived, and its body is stripped bare and painted. All that takes place in a handful of specified work areas -- disassembly, power train, and such -- until it arrives at final assembly, where the body is put back on and the car rolled out the factory door.

Meant as much to be motored as admired, the now-gleaming hybrid -- cosmetically '60s, mechanically '90s -- is promoted in sales material as "the best of both times." Whatever marketing boost is needed beyond ADC's generic brochure is up to individual dealers to provide. Even though it hasn't yet been determined whether there is a market for such cars, Seasonwein says that whenever the concept was shown to a target audience -- aged 35 to 60 -- people were wowed by the product and the affordable price.

ADC has no intention of competing in the primary-transportation market. The strategy is to gain a fraction of an undefined but obviously large and still-growing market -- Road & Track recently reported that 38% of its readers owned pre-1968 cars -- by pitching DreamCars as head-turning showmobiles. Seasonwein himself cruises to ADC's Bethesda, Md., headquarters in a yet-to-be-reconditioned '57 Bel Air Sports Coupe.

In addition to concerns about the continued availability at reasonable cost of the company's basic resource -- the original cars -- Seasonwein has to juggle typical manufacturing factors such as labor, shipping, inventory, and distribution. He also must worry about committing to prices of finished products whose costs are not all that predictable. In its first six quarters ADC spent $1.2 million of working capital. But $200,000 a quarter is a snail's pace compared, say, with John De Lorean's luxury-sports-car start-up 10 years ago, which devoured $15 million a quarter during its 16 quarters.

But unlike De Lorean Motor Co., ADC's aspirations are quite modest. Its goal is to be breaking even by the end of its second fiscal year this month, a delicate balance that, at the least, will require the output and immediate sale of 24 cars a month. ADC's pro formas show annual earnings of $900,000 on sales of 400 cars by 1992 and more than $4.4 million on 1,200 cars annually by 1994 after a proposed expansion, yielding a pretax margin of 18.6% (see "Financials," page 4).

Eventually, ADC intends to remanufacture a car for $12,300 on average, including a core-vehicle acquisition cost of about $4,000 and a direct-labor allotment of some $1,850. As early estimates have proved less realistic, the company has adjusted its expected labor costs. "Twenty minutes into doing our first car," recounts Timothy L. Cline, ADC's one-person middle-management team, "we discovered our initial numbers were wrong." The guinea-pig vehicle ate up 1,000 man-hours of direct labor, a cost of $14,000. To speed up the learning curve and output, four outside subcontractors were hired to rebuild a car each, so ADC could determine how best to proceed. Not one car was completed. "We paid dearly to find out one essential," says Cline, "that we have to have complete control over everything."

At the end of May 1990, after six months of trial-by-error engineering of its reassembly techniques plus one month of line production, the average time devoted to each vehicle still was 773 man-hours. That factor must be lowered to 161 simply to break even. Then, presuming that can be achieved and held, ADC will have to steer around a number of other potholes, some as yet unseen, to maintain even moderate levels of income.

Here is a selection:

* * *

* Will the supply of car bodies dry up? It's not likely. Muscle cars were manufactured by the millions, and even if the lion's share lie rusting in junkyards, ADC needs but a minuscule percentage. If one model becomes too expensive or scarce -- as Bel Air convertibles have -- production can switch to still-plentiful types such as Chevelles, Gran Sports, or 'Cudas. The rule is that a dealer wanting delivery has to take whatever is going through the factory, which depends on whatever ADC's buyers happen to have acquired.

Rather than rely on just-in-time purchasing and the willingness of owners to part with their suddenly coveted heaps, ADC could stock up on vintage machines. But if they're stored outside, Seasonwein frets, they may be vandalized; if kept inside, they'd occupy valuable cubic footage. And hoarding a meaningful number would tie up serious cash. Besides, he says, "accountants attribute overhead to cars that are in inventory, and it drives your inventory costs up."

* Will replacement parts be hard to find? Possibly. So far, so good, though. Even after 20 years body parts such as fenders remain available off the shelf, because such replacements were produced in the same large quantity as the dented cars they're sculpted to fit. And if a part is not in stock, some original equipment manufacturer likely has tooling to stamp out an order.

As for elusive trim pieces such as tail-fin bezels or hood ornaments, the worst that can happen, foresees Bianco, is that the company will have to make its own. Far from being distressed, he views such a lack as a growth opportunity. "Think of a subsidiary called American DreamCar Parts!" the entrepreneur muses. One of ADC's suppliers, Year One Inc., of Tucker, Ga. (#308 on the 1988 INC. 500), sold more than $8 million worth of muscle-car accoutrements in 1989 alone.

* Will working capital run out? Unlikely, as long as there are car fanatics -- or bargain hunters. To sweeten the first round, each investor was offered an American DreamCar for $1,000. Bianco's intention was to use the first $1.75 million to stay in business long enough to get product flowing. After 18 months or so the plan was to raise more through a public offering. In July 1989, however, some cash came from an unlikely source. Bianco was approached by a public corporation with $600,000 lying idle in its treasury. Through a reverse merger, the shell, an entity called Access Capital, in Bethesda, acquired an interest in ADC, after which the corporate name was changed to DreamCar Holdings Inc. Its only holding is American DreamCar. In exchange for about 18% of the original company, ADC gained both an easy chunk of second-round capital and a public market.

Even so, the aggregate $2.35 million threatened to approach zero well before the operation could become self-sustaining. In March 1990, therefore, a second private placement for up to $1.25 million more in working capital got under way. With virtually no debt (as of April 30, 1990), ADC could look to the public for a flotation; its NASDAQ symbol is DCAR. However, this past summer its 52 million common shares, not to mention an overhang of warrants, were trading for around 50 each, at which price the stock market valued the company at more than $26 million. Talk about American dreaming.

* Will the concept be rejected by retailers? Quite the opposite. One attraction of taking on the ADC line is that a dealer can enjoy a markup of 25%. Compare that with the recent estimate from the National Automobile Dealers Association, which brooded that between 1990 and 1997 new-car dealers will realize an average 0.4% return on sales.

In fact, scores of would-be ADC dealers have been held at bay ever since three prototypes -- a '67 GTO, a '57 Bel Air, and a '69 Mustang -- were unveiled at a trade show in Las Vegas last February. Instead of the handful of queries ADC expected, 160 dealers showed interest, says de facto sales manager Cline, some begging to buy the show cars on the spot, despite Big Three prohibitions against their franchisees' carrying off-brand lines. Overnight ADC's problem became not one of representation but of supply: how can you sign up dealers if you have nothing for them to deal?

As of June, 9 dealers had already been enlisted of the 15 or so ADC intends to end up with nationwide in its first phase. Each was a new-car dealership, an ADC criterion. One, Dream Cars of Connecticut Inc., was established in Milford specifically to handle ADC products. Its reasoning, as expounded by owner George DeLauri, "I decided this was a good market area. Fairfield County is one of the richest in the country, and there's a return to nostalgia here -- '60s restaurants, old-car clubs, and so on. I had been thinking of putting something together ourselves to sell restored cars like these, but after I saw American DreamCar in Las Vegas, I realized I couldn't do it for the same dollars. And I wouldn't have the quality or the backing of their warranty."

* Will demand fall short? You don't need to sell many cars to make money. Bianco's importing company was moving only about 250 a year to the United States before GM bought it, for example. Even if those cars happened to be exotic Lotuses from England, which went for considerably more than domestics, the principle is the same: low volume, big margin. "They'll be popular," DeLauri predicts, "but not as popular as 10 a month." Dream Cars of Connecticut will be content to sell 4 a month, he says.

* Is the price too low or too high? Your guess is as good as theirs. Seasonwein discusses how prices were determined: "To make it more like a new car than a used car, it was important to standardize the retail price. Real car manufacturers determine where they want their car to be in the marketplace and work backward from there; they have to shave costs off the car if it's too expensive to make a profit. We went at it the other way. We knew approximately the acquisition cost of a core car and what it would cost to buy parts. We thought we knew -- and didn't, but have figured it out since -- how long it would take to tear one of these cars apart and put it back together. From that, we ballparked what it would cost to add the parts and shove it out the door."

ADC first thought it could sell its cars at $12,000 to $18,000 -- a good price since that was less than half what their collector-car counterparts were fetching at auction. Another lesson the learning curve demonstrated was that no profit could be made at those levels. Suggested retail was cautiously jacked up. "We've purposely been going slow, because I don't want to put us in a position where we price ourselves too high and have to give rebates," says Seasonwein. "The day we give rebates is the day I'm out of here."

Another of Seasonwein's realizations was that "when you strip down the body to bare sheet metal, that's the moment of truth; you have to live with what you get." Sometimes you have to live with patches of plastic putty where metal used to be. One reason for raising prices is that ADC now pays more for higher-quality core vehicles than planned.

* If it flies, will there be competitors? Without doubt. There's no secret to selling these cars, Cline grants. But there is a secret to modifying them efficiently. So secret that when ADC brings dealers to Cleveland, visitors aren't allowed to take pictures.

* Will it take time for economies of scale to be realized? Maybe. Even in the tiny universe of the six or seven different models that ADC focuses on at a time, it has already established sources for thousands of replacement parts. Although ADC is a national account with a few OEMs, such as its engine remanufacturer, it has been seeking more. But at only 240 to 400 cars a year, qualifying for discounts and favorable payment terms isn't yet a given.

* Will needed expansion be too expensive? Probably not. ADC is looking for a 50,000-to 75,000-square-foot building with acreage to expand into and has already contacted the mayor's office and the Greater Cleveland Development Corp. in search of it. "They like what we do and where we do it," says Seasonwein, who intends to set up an industrial revenue bond in an enterprise zone around Cleveland, thus qualifying for tax abatement and public funding.

* Can the business be run from 600 miles away? We'll see. It's inefficient, but it keeps the CEO happy. Why doesn't Seasonwein leave Bethesda for Cleveland? "Because I like it here," he says with resolve.

What a strange and powerful force is nostalgia: older and older stuff changes hands at higher and higher prices, and buyers never run out, it seems. Indeed, the Americana market has shown little sign of fizzling, neither in autos nor in baseball cards, carousels, Coke, comics, and on down the alphabet of coveted native memorabilia.

Bianco's revivals, however, aren't authentic nostalgia, adding another layer to the considerable challenges the company already faces. Like many other manufacturers, ADC must attend to such conventional details as finding adequate yet reasonably priced facilities to grow within, attracting and keeping skilled labor, and lowering labor costs to sustain the pricing levels it has committed to. It also has to solve some inherent problems such as establishing and transporting a steady stream of base components, standardizing disparate parts from hundreds of outside vendors, and tying into a dealer network ruled over by giant competitors.

It also must convince 1,200 consumers each year that its neither-fish-nor-fowl artifact is better than the real thing. If it can't, CEO Seasonwein may be in a position to offer you a nice '57 Bel Air Sports Coupe in good condition. Cheap.

* * *

EXECUTIVE SUMMARY

THE COMPANY

American DreamCar Inc., Bethesda, Md.

The Concept: Efficient and systematized reconditioning of classic American muscle cars, targeting the nostalgia market with an affordable product that yields high margins.

Projections: Break-even by October 1990 (end of second fiscal year) on sales of $474,000. Annual earnings of more than $900,000 on sales of 400 cars in fiscal 1992; earnings of $4.4 million on sales of 1,200 cars in 1994, yielding a pretax margin of 18.6%.

Hurdles: Are there enough buyers for $20,000 reconditioned cars? Can labor and raw-material costs be kept low enough to yield acceptable margins at projected price ponts?

THE FOUNDER

Joseph J. Bianco, Chairman

Age: 40

Source of idea: Fond reminiscences of Camaro from youth and a suspicion that many other drivers shared the nostalgia

Equity (held separately by wife): 26.2%

Workweek: 5 to 10 hours

Salary: $5,984

Education: Yale Law School, 1975

Outside directors: Yes

Other businesses started: British Performance Car Imports Inc., general partners with Lotus Performance Cars, 1982; sold 1986. Van Allen Capital, 1983; dissolved 1986. Fulcrum Capital, now called Whyte Lyon & Co., 1987. Sentex Sensing Technology Inc., 1983. Cognitive Systems (cofounder), 1981.

FINANCIALS

American DreamCar Inc. Projected Operating Statement

($ in thousands) 1992 1994

Units sold 400 1,200

Man-hours/car 152 127

Revenue

Average unit price $19.75 $19.75

Total Revenue 7,900 23,700

Cost of Revenue

Core-car and major components cost 5,031 14,674

Labor cost 886 2,215

Total Direct Expenses 5,917 16,889

Overhead* 1,082 2,380

Total Expenses 6,999 19,269

Profit 901 4,431

*Includes rent, utilities, telephone, accounting, legal, leases, insurance, travel, and marketing


WHAT THE EXPERTS SAY

COMPETITOR

ALAIN CLENET

Manufacturer and marketer of custom cars, 1975-82. Founded ASHA Corp., an automotive-development company in Santa Barbara, Calif., 1986

The venture has a lot of merit, and I completely agree with its point of view. The formula is not to make a collector car, but a nostalgia car. Nobody makes good money restoring cars. And buyers won't care if the car isn't absolutely authentic. They want the car they always wanted, and suddenly it's available with the reliability and comfort and service that collectors' cars do not have. But it's a hell of a lot to control, mostly because of the training. When I was in manufacturing, there were 360 parts vendors, and we had more than 4,200 parts numbers -- for one model alone! If I were in American DreamCar's shoes, I would stick with only three models: the Mustang, the Camaro, and the GTO. They were a reasonable size, and they're in plentiful supply.

But how can it be done economically? Twelve percent return is not enough. ADC would do better with progressive integration, which means going vertical (manufacturing subcomponents). And I doubt that 160 man-hours is possible. Maybe something like 200 when it's producing 1,200 a year. Also, it has to have specialists purchasing the cars, because a car full of holes ends up costing twice as much. It should focus on the West Coast, since that's where the cars without rust are. But cars it buys there will be tagged with a good $500 in extra transportation [to ship to them back to Cleveland]. Therefore, location becomes important. It would have been easier to handle everything from California. In lieu of enlarging the company centrally, eventually it could repeat the same system in other locations, that is, if the first is successful.

OBSERVER

MATT DeLORENZO

Editor, AutoWeek, a magazine for car enthusiasts, Detroit; published article pointing out American DreamCar's deleterious effect on collector market in April 1990

The notion of recapturing one's youth with an updated old car is appealing. Given the success of the Miata, which rekindled interest in the 1960s and '70s sports cars, there's no doubt that American DreamCar will do the same for the muscle car, especially in that the reliability of a new car takes away the nostalgia-oriented driver's basic fear that the thing won't run. Collectors have bid up the prices of real muscle cars to, in some cases, way more than an equivalent American DreamCar, and that'll work to support its market.

The downside is that the market is based on a fad, which this current trend may be. It can vanish as quickly as it appeared. And buying an American DreamCar will be a onetime deal. At those prices, there won't be much repeat business. When owners tire of their toys -- which really is what they are -- used DreamCars will compete with new DreamCars. If and when the fad dies off, you could have an oversupply. It'll be interesting to see what happens after the company sells a couple of thousand.

FINANCIER
BENJAMIN M. ROSEN

Founding partner, Sevin Rosen Management Co., a New York City-based venture capital investor in more than 40 start-ups; has his own collection of Americana memorabilia

The idea is clever. But my gut reaction is that there are flaws in its concept of the nostalgia market. No doubt people are willing to pay premiums, but only for an authentic article. When the article is ersatz, value and price and market probably get diminished. I don't have a real feeling for [the market for refabricated nostalgia cars], but it may be big enough to support the idea.

Looking at it financially, American DreamCar's outstanding problem is that its gross margins are too low for a manufacturing company. I'm afraid it's underestimating what the below-the-line expenses are. It hasn't budgeted enough for harder-to-visualize items such as general-and-administrative, sales, and marketing costs. Even as its projections look to 1,200 units, it doesn't show enough gross profit to support what I think will be true overhead. For example, since it's trying to create a new market rather than exploit an existing one, the costs associated with setting up a dealer network may come as a surprise.

This means that ADC's cookie-cutter financial model for manufacturing and marketing a car, if adjusted for reality, is not attractive to a professional investor. Therefore, the company may be in a bit of a financial bind. A positive aspect of its shell financing is that it got cash on reasonably good terms. On the other hand, a private placement would have to be for far, far less than the public valuation, and that would have implications for public shareholders. It would be very hard to do a public financing, given the state of the company.

That ADC doesn't have debt is appropriate to this stage; it's hard for a company that's losing money as it'll be for a while to absorb debt-service cost. Therefore, it should be able to continue to get financing for the operation from friendly sources, who obviously have been willing to make necessary leaps of faith until the financials prove realistic.

MARKETER

JIM WANGERS

Created and promoted the concept of the muscle car while at Pontiac's ad agency in early '60s; wrote lyrics for hit song "GTO"; now runs own firm, Automotive Marketing Consultants Inc., in Detroit

Needless to say, I'm an enthusiastic backer of the concept, notwithstanding some difficult business aspects. If there was one thing Detroit was good at, it was piling on horsepower. American DreamCar is bringing that era back, along with a level of quality that consumers at least think they remember. Given the drivability of its cars, the company might attain a level of acceptance, of snob appeal, that could rival Japanese or German cars.

ADC should continue to restrict franchises to about one per major-market area, maybe 40 altogether in the country. An attractive aspect of an ADC franchise is you're looking at only a couple of hundred thousand dollars to get it off the ground. You don't have to stock hundreds of cars like everyone else.

Supply may be more limited than realized, and the company may face a serious setback as popular cars such as GTOs and 442s get thinned out. Thanks in part to ADC itself, owners today are asking $8,000 for beat-up '69 jobs that would have sold for $1,500 just a year ago. I was a little surprised the company didn't take some of that first capital and go out and buy what it could so it would have a bunch of cars to work with. There's no question that the average cost of basic units is going to increase significantly.

The company's got to move quickly to deepen the line. It's an unfortunate selling premise for a franchisee to be told it has to take what it's given. In a revival atmosphere, buyers have serious preferences and little patience. Right now ADC can't predict when it'll be able to deliver certain choices. If it offered five or six key models and could build any one on order in a month, that would be acceptable. I realize I'm spending money ADC doesn't have, but it's what's needed for growth.

Last updated: Oct 1, 1990




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