I was raised in a Plymouth Brethren
church, which did not make me a “Good Christian”. The Bible says, "No one is righteous--not even one”,
so what this upbringing did was
lay the foundation for what I am today, which is a sinner saved by grace
through faith. This is not my own doing,
as it’s a gift from God, who shed His own blood on the cross
and paid the penalty of sin, which is death, in my place.
I began my carrier fresh out of school joining the staff of a non-profit evangelical Christian organization that ministered to students on college campuses. I was based in San Francisco where I grew up, working full time at two different colleges sharing the gospel with students, leading bible studies, and working with new Christians individually to strengthen their recently found faith.
The predominant thinking of college students at the time was existentialism, and we used the following booklet on campus when talking with students about our faith. This was prefaced on the assumptions that the Bible was true, and Jesus was who he said he was, which is God in the flesh. If they wanted to hear what the booklet had to say based on these assumptions we'd share it with them.
I was part of a staff of 30 in the San Francisco Bay Area as far south as Monterey, where we also had a military ministry at Fort Ord and northeast at Travis Air Force Base. It was typical to see 250+ students and military personnel at our quarterly retreats in the Santa Cruz Mountains, where new Christians from all the campuses and bases would converge to fellowship and hear speakers for a weekend.
After two years I was given the responsibility of helping expand the organization's ministry to churches and sent to Nashville where I traveled an eight state region setting up week long seminars in churches to teach Christians how to more effectively share their faith. This had me on the road 20 days a month and after signing up a church a team would fly in and teach the seminar, which could involve several churches in one city.
It wasn't very sophisticated marketing. I drove to a city and went into a hotel lobby where they had banks of payphones and looked up the evangelical churches in the area with the phone book. I made a list and got a map, then drove from church to church cold calling on the pastors and explained our program to them, which cost their parishioners $35 each with more advanced seminars available as a followup at a later date.
This is basic sales 101 and used for 100s if not 1,000s of years by companies and organizations to meet prospects and demonstrate new products or services. It's a bold and direct method that gets results and our approach to students and servicemen on campuses and military bases wasn't much different, except there were no lists or maps and we weren't selling anything; we were giving the Gospel.
A year into this I was moved to Washington DC where I worked out of the organization's Capital Ministry's Headquarters at L'Enfant Plaza for two years. I spent most of my time on Capitol Hill in meetings with Senators, Congressmen and their staff, teaching Bible studies, leading small prayer groups, and working with DC area churches participating in our seminars on Evangelism.
I left the ministry in 1976 and moved back to Nashville landing a job with Mercedes Benz USA. While there I met a retired gentleman, Earl Davis, who was a very successful entrepreneur and former General Motors dealer with eight locations in and around Mansfield Ohio. After selling his dealerships when he retired, he reinvested into a small company called Dollar a Day Rent a Car, where he was a founding partner.
This later became “Dollar Rent a Car". He owned 15 locations, which included the airport locations in Los Angeles, Las Vegas, and Miami. Earl lived in Palm Beach Florida where he owned a 60 room beach front home and played golf seven days a week. His live-in girlfriend was the retired founder of a company with a national chain of 2,300 women's casual clothing boutiques located in shopping malls.
Using his relationships at some of the largest car dealerships in the US located in Detroit, Earl was ordering new cars for his golfing buddies with the same system his car rental company used when placing orders for fleet cars, which were drop shipped at local dealers in the market area of his rental locations. His buddies were buying at factory invoice with Earl adding $250 to make it worth his while.
What allowed the process to work was a 2% "Hold Back" incentive paid by the factory to the ordering dealer on a car he never saw or had investment in. The delivering or "drop ship" dealer had no investment either and was paid a “Make Ready" fee by the factory, which was a profit center as well. There were no salesman's commission so these sales were pure profit for both the ordering and delivering dealers.
Coming from a Mercedes Benz environment where there were no discounts off retail, I was amazed at how one could circumvent the normal process and deliver cars to private individuals at "Factory Invoice" where the overhead of the ordering dealer and delivering dealer were bypassed, just by altering how the paperwork was entered into the system. His buddies were saving hundreds if not thousands of dollars.
My first question to Earl when hearing this was; "why don't you franchise it?" His response was; "why don't you?" That was the only challenge I needed and with Earl and Francis's help we spent the next six months setting up a company to sell and administer the front and back-end infrastructure of a franchised version of this concept called, “Direct Auto Buying Service", which I had 25% equity ownership in.
Our first office was a walk-in closet in the basement of my condominium in Buckhead, GA. We started running the ad seen below in newspapers in cities around the US and I hit the road meeting with prospective franchisees. Earl's girlfriend took care of the books, Earl mentored me on the sales and marketing, and my girlfriend managed the daily business activities out of our home based office.
We sold 100 franchises our first year. By late 1979 our new office in a business park had grown to 20 people and we had four sales people traveling 300 days a year selling franchises. We'd sold over 1,800 franchisees in 48 states that were expanding at a rate of 75 franchises per month, and we were processing orders for over 5,000 cars per month, making us the fifth largest mover of new cars in the US.
With Earl and Francis both having substantial backgrounds in franchising our infrastructure was modeled after their experience. Our salespeople were on the road 8 - 12 weeks at a time without a break, meeting prospective franchisees at their hotel for coffee or a meal in three hour appointments that began at 9:00 AM, with another one every three hours through a 9:00 PM appointment, seven days a week.
The following is a copy of the “Marketing Representative" ad we ran to hire salesmen, and a copy of their contract with us:
To support this type of operation the infrastructure included our own in-house ad agency with a gal responsible for coordinating and making sure ads were running in a dozen or more cities in newspapers each weekend. These were located in the “Business Opportunity" section, the “Classifieds", and on the "Financial" page. On any given weekend we had over 250 people responding to our ads.
Each salesman had his own inside support gal who took these leads, qualified them as having the financial wherewithal to become a broker, and set up the salesman's appointments. We also had our own in-house travel agency that one gal managed, who was responsible for buying airline tickets and making reservations in one of the major hotels where the salesman was to meet his clients.
The rest of the staff were involved in managing the broker's orders, which averaged over a couple hundred a day. The gals handling orders and delivery with dealers were divided up by make of car. The brokers were divided by region according the individual broker's location and there were gals responsible for inside support of these brokers, who were region specific.
The following is a copy of the contract we signed with our brokers and a newsletter we sent out monthly:
The NADA was terrified of us and going to great lengths to stop what we were doing. This editorial from the Automotive News in 1979 describes an attempt by the South Florida Automobile Dealers Association to put out misinformation in an effort to discourage people from buying through our brokers. Attacks like this only served to draw positive attention, giving more exposure to our brokers and increasing orders.
It was obvious in this Automotive News article that this large expansion of new car brokers was not being associated with a national organization, i.e., Direct Auto Buying Service, when it says “The number of brokers seems to have proliferated sharply in recent years". This is exactly how we wanted to keep it, as at our current size and stage in development we didn't want to attract competition.
The first three year phase of our marketing strategy was to get a national network established under the radar in every city in the US with a population of 30K or more. For this reason all of our franchisees operated under their own business names, as to not draw attention to what we were doing nationally, so no one could connect brokers like “World Auto Sales" in San Jose with “Direct Auto Buying".
Once the broker network was in place, the second phase was to appear out of nowhere in over 300 cities within six months under one name. The model for this unveiling was a test market we did in a southern US city where a uniformed young woman in a permanent kiosk in a mall, branded under the name “AutoFax", was providing quotes with a $250 brokerage fee over factory invoice for the car model of choice.
The overhead of the kiosk was covered by a $10 fee we charged for the information, which was generated off a computer terminal in the kiosk tied to the same service dealers used to price orders with the factory. Along with this factory invoice quote they were given a brochure titled, "Don't Buy a Car In the Dark...Get the Fax", telling them how to use the information to go car shopping.
This became a broker's lead generator and gave the potential car buyer ammunition to go to the local dealer and negotiate the best deal possible, knowing what the dealer paid for the car. Within 48 hours the potential customer was followed up by our broker on the phone to answer questions and walk them through our ordering process. Over 50% of these prospects became our customers.
The original $10 fee for the factory invoice quote was refunded when ordering through our broker. In addition to having factory invoice pricing, we also had used car values published by the industry at our fingertips. Up to that point when an individual wanted to sell a used car there was nowhere to go to determine what the selling price should be, making them severely handicapped.
These customers were given that information and assistance to get the most when selling their used car, using auto detail shops the broker contracted with to make the car ready to sell in the newspaper. This service generated $100s of additional savings for the customer, as dealers typically pay far below wholesale value for a trade in, and the broker's customers were getting full retail.
This was when there was no Internet where one could search this information, and Kelley Blue Book, which was the only one publishing it restricted their publication to automobile dealers only. Not even the salesmen inside a dealership knew what the factory invoice cost was, so our broker's customers were better informed when shopping than the fellow trying to sell them a car.
We had non-compete lease agreements pending with over 275 malls across the US, where we hand selected our most successful brokers for this second phase of marketing, with an additional $35K franchise fee to cover the cost of a kiosk marketing strategy used by the rental car companies in airports. We were poised to unveil ourselves overnight and appear out of nowhere with this business model, giving us national exposure.
Things changed when Jimmy Carter was President in late 1979 and interest rates had climbed from 14% to 23% over a four month period. The country was heading into a sever rescission and car sales dropped to their lowest point in recent history. Thousands of dealers were dumping huge quantities of inventory on the market below cost just to get out from under the interest and many went bankrupt.
With diminishing opportunities for brokers to compete with dealers flooding the market with cars below invoice, our franchise sales plummeted in less than three months from an average of 75 to less than 25 a month, with the value of my ownership position dwindling along with it. Seeing the handwriting on the wall I felt it was time to cash out while I still had an opportunity to show something for my efforts.
Traveling over 300 days a year I hadn't had much of a personal life, but with what little I did have I'd pursued my passion for exotic cars. During that period I owned a 57' Rolls Royce Silver Cloud, 65' Jaguar XKE convertible, 62' Jaguar Mark II, 63' Porsche 356, 74' Citroen SM Maserati, multiple Mercedes and way too many others to mention. I'd keep a car about 90 days then flip it for a different one.
At 28 years old I was burnt out! I'd achieved something beyond my wildest imaginations and was ready for a break, so I sold my equity interest in the company to Earl and Francis and moved home to San Francisco in early 1980. It was never about making money for me, nor has anything I've ever done, as I'm not money motivated. What has always driven me is the adventure and sense of accomplishment.
After leaving, Direct Auto Buying Service didn't survive the recession and closed its doors. Many of the franchisees became independent new car brokers using connections and systems we'd pioneered. Some later established Internet versions of this concept like "Autobytell" who today move millions of cars a year and are literally changing the marketing structure of the automotive industry.
After selling my interest in DABS I took the next year off to relax and unwind, spending my time reading, eating and sleeping. At church one Sunday I saw a 1952 MGTD roadster sitting in the parking lot. After further examination I discovered it was a very well manufactured high quality reproduction with a fiberglass body, leather interior, Ford drive train, and built on a ridged ladder type frame.
Asking around I learned it was owned by a surgeon who attended church there and I introduced myself. He was a car enthusiast with a collection of vintage Ferraris and the MGTD was his daily driver. I was ready to find something else to do and suspecting an opportunity to utilize my marketing experience in the automotive industry I inquired about where it was made and how it was marketed.
It turned out the car was manufactured in North Dakota and the doctor had been approached by the company president to get involved in a business opportunity as the exclusive distributor of their cars for the State of California. Classic Roadsters of California was created and I set about putting together a marketing plan to meet the required sales volumes to keep that exclusivity.
As part of this I flew to Fargo North Dakota to meet the owner / president of the manufacturing company to solidify the relationship and negotiate our exclusivity. With substantial financial resources available to us to implement a strategy, our proposal was accepted and I was off on another adventure. While on that trip I met a young farm girl fresh out of college (Gloria) and it literally was love at first sight!
Gloria grew up on a 3,840 acre farm in the Red River Valley that had been in the family since it was homesteaded in the 1800's, which had expanded from 40 acres with a sod house to what it was today. Her mom and dad were very successful farmers and had retired debt free; leasing their land to a large corporate entity and spent their winters as “snow birds" in the southern US.
In conventional marketing a distributor's role with the manufacturer is to maintain inventory, which is sold to a retail dealer network that the distributor sets up and services. There was nothing conventional about this car. Early in the startup I sold the Rolls Royce / Jaguar dealer on Van Ness Avenue in San Francisco a four car inventory of roadsters, but this would be a very hard sell in any other market.
The factory in North Dakota marketed the car via national magazine advertising, with their salespeople using telemarketing and brochures mailed out like the one below to walk potential customers through the buying process. My strategy was to use the infrastructure already existing at the factory for handling the sales process and focus my efforts on generating prospects in the field using the roadsters as lead generators.
One of the things the roadster had going for it was the amount of attention it generated. It was rare when sitting at a stoplight to not have people roll down their windows and comment on what a gorgeous car it was, or to be stopped on the street and not have people asking questions about it. It was clear that a percentage of these people were potential buyers, which helped formulate my plan.
As a test model I started taking names and contact information on cards I kept in the driver's door side pocket that I'd forward on to the factory for follow-up. My role was to meet up with the prospective buyer again once the factory had walked them through the qualifying process. I'd take them for a drive of the roadster, cover finer details of the features and benefits, and answer any questions.
The actual sale was closed by the factory, on which we were paid $4,500 to $7,500. This meant we didn't have to maintain inventory and the factory was thrilled with the new source of orders. Coming from a business opportunity franchise sales environment, I thought rubber stamping this throughout California, where we'd place "Field Representatives" with their own roadster in select cities made sense.
The demographics of the individuals I was looking for were from a very narrow segment of the general population. They needed the discretionary financial wherewithal to be able to buy a $15K - $25K toy, have an interest in classic cars, and have the business entrepreneurial skills and desire to want to be involved in generating income using the roadster as a business vehicle to do that.
Chances are this person was retired with substantial net worth, and it appeared I could identify the individual in specific cities by the magazines he read using subscription lists. Direct mail seemed to be the perfect means to achieve this. I chose Car & Driver, Road & Track, The Robb Report, Hemming's Motor News, Entrepreneur Magazine, and INC Magazine as my potential lead sources.
To confirm this theory I selected Sacramento as my test market. I rented the subscriber lists in Sacramento for these magazines and merged them all together by computer, then purged the ones out who subscribed to all six of these publications. I purged that list again by zip code where I could determine property values, in order to make sure they were financially qualified.
I designed the brochure seen below and wrote the following letter to go with it in this mailing, which would qualify the individual financially as a prospect and briefly explain the program. Unlike typical junk mail, I printed this on high end linen watermarked stationary and envelope, and used a bulk rate wet and stick stamp, so it would appear personal and increase the chances of it being opened and read.
This was before PCs, and we rented time on an IBM OS/6 laser printer to address the envelope and produce the body of the letter to make it personal. This computer was almost the size of a small bedroom, which was state of the art at that time. The signature at the bottom of the letter in blue ink was offset printed on the stationary along with the logo, which was also on the envelope.
From our merge and purge of these subscription lists we generated around 5,000 names and addresses in the Sacramento area. At best, successful bulk mail response ratios run somewhere around 1% to 2%. Our response to the mailing was over 6%, which is unheard of, and I believe resulted from how well we had defined the demographics of those we targeted and the quality of the mailer itself.
The administrative side of the business was set up at the medical complex where the doctor had his offices. His personal assistant handled the books, was responsible for the mailings, making my hotel reservations, and scheduling my appointments. I patterned this after Direct Auto Buying, which allowed me to focus 100% of my attention on meeting with prospective Field Representatives.
Like Direct Auto Buying, the rule for determining how many brokers we put into a market, which in this case were Field Representatives, was based on the number of Chevrolet Dealers located there. Our thinking was if a market area could support a major automobile dealership it could support an individual broker or Field Representative, and we found this to be an equitable guideline.
Sacramento had a population of around 800K with 10 Chevrolet dealerships. With a mailing response of around 300 we could be very selective in who we chose as the 10 Field Representatives out of this group. The objective was to place people in the market that had the right skills to make it work, as the real money made for us wasn't when we leased them the car, but when they made money.
Earl Davis pounded four rules to a successful business in my head. 1: it had to be an honest venture based on integrity, 2: it had to be profitable, 3: it had to cash flow itself, and 4: you never use your own money to make money, but always use someone else's. This met those criteria, as it was the Field Representative's lease of the roadster that covered our initial marketing costs, and his leads generated continued net income.
Selling business opportunities or franchises fringes on selling securities and the Federal Trade Commission has oversight of franchising, rather than the US Securities and Exchange Commission. With both Direct Auto Buying Service and Classic Roadsters of California we were registered with the FTC and followed their rules and guidelines for financial responsibilities and disclosures.
Most of my time in this process wasn't one on one with prospective Field Representatives, but the time spent in the interview process on the phone with each individual to determine if he had the wherewithal to be successful and the motivation to make it work. Out of 300 prospects I narrowed the group by phone down to around 25 people to meet with individually at my hotel, and I solidified contracts with 10 of them.
The real opportunity for this venture was Southern California, but I didn't want to go into the Los Angeles or San Diego markets without a proven system that had the marketing and infrastructure bugs worked out. I used the San Joaquin Valley as my test bed for this, moving south from Sacramento into Stockton, Modesto, Fresno, Visalia, and then Bakersfield before entering the Los Angeles area.
The advantages to the Field Representative was that he could take the depreciation on the vehicle personally as an LLC, plus write off the gas, mileage, and maintenance, and for every sale that was made from the leads he generated he was paid $500. With a lease payment under $400, one sale a month covered his overhead and everything else was a bonus. In short, the car cost him nothing!
In a relatively short period of time our sales in California were exceeding the factory's total US sales from this strategy. This resulted in the owner of the North Dakota manufacturing company to make me a very attractive offer to move there and implement a similar program nationally, along with developing other new markets and strategies for selling their roadsters.
It wasn't a difficult decision! I knew within five minutes of meeting Gloria I was going to marry her and this closed the gap on the long distance relationship we'd begun. In the fall of 1981 I made the move, taking the responsibility of managing the existing California Field Representatives with me. Going from living in downtown San Francisco to Fargo was a great move and a huge culture shock!
Gloria and I were married in May of 1982 and prior to that we bought a 5,800 square foot three story Victorian home located in the small town of Kindred North Dakota, which is a farming community, population around 300, about the same size as the farming community of Halsey Oregon where we are now. The house was built in 1883 and we were the second owners, with plans to restore it.
We cloned the Field Representative concept out of Fargo, using the in-house sales force to walk potential business opportunity inquiries through the program, which they did in addition to their normal activities of selling roadsters to private individuals interested in the car purely for the enjoyment of driving. My responsibilities expanded to marketing a concept to put the roadsters into rental car fleets.
“Rent a Classic" was born and I hit the road calling on major rent a car locations in the “Sun Belt" states. Like my experience calling on churches when I was in the ministry, it wasn't a very sophisticated strategy. The factory would drop ship a car at the hotel where I was staying and I'd use it to call on local rent a car agencies in the area using the phone book as a lead source.
Classic Roadsters was constantly developing new models. Shortly after I arrived in Fargo they unveiled a reproduction of the 1952 Austin Healy 3000, that was available with high performance Ford 2.8 Liter, 3.8 Liter V6 engines and 4.2 Liter, 4.9 Liter V8 engines. It had roll up windows, a removable hard top option, and was as substantial as any car rolling off assembly in Detroit.
It was rare that I didn't drive into a rental car location and not lease or sell roadsters into their fleet. The most difficult problem I had was convincing the owner that no matter what he was willing to pay over the selling price, he couldn't buy mine out from under me until I was finished calling on the other agencies in that particular market, as I wouldn't have one to show other potential locations.
The car below was one Gloria (sitting on fender) and I picked up in Phoenix and drove to Las Vegas, Palm Springs, and Los Angeles, then San Francisco, where I sold roadsters to multiple rental locations in each of those markets. We were on the road over a month and after selling the car to a San Francisco rental location we flew home and began the process all over in other states.
Classic Roadster continued to introduce new models as I was expanding our "Rent a Classic" concept into Arizona, Texas, Florida and other markets. These included a 1939 Jaguar SS100, 1935 Mercedes Benz 500K, and a Cobra. They also introduced a second Austin Healy, which was a muscle car with a wider track, flared fenders, and the same engine options and chassis as the Cobra seen below.
The abuse these cars received in a rental environment gave us a test bed to evaluate and enhance durability and quality, which was in a constant state of improvement. Multiple roadsters had been in accidents and we were able to evaluate these wrecks. From the information gathered, Classic Roadsters built many of the safety features into the roadsters found in conventional cars.
We had a co-op advertising program where we provided images and copy and paid 50% of any advertising where they could show proof of placement, as seen in the following ad by one of our Los Angles rental car operators. The cars also became lead generators for sales from rental customers and the rental operators were paid commissions similar to our Field Representatives.
In addition to supporting the rental locations with advertising media, we also ran our own ads in places like "Automotive Fleet and Rental News" magazines and did trade shows targeted to the rental industry. The following is an article written about us by one of the industry trade publications, “Car Rental / Leasing Insider". These various media outlets provided a constant source for new rental location prospects.
By 1983 Gloria and I had started a family and on weekends when I wasn't traveling we worked on restoring our home. I love working with my hands and have been an avid woodworker since junior high. I'd set our garage up as a very well equipped wood shop, which was a great place to take my mind off the daily pressures of business and the grind of being on the road.
We gutted the entire interior of the house down to bare 2X4s, replaced all the wiring, and windows, and re-insulated it, we also replaced the roof and heating system, and removed all the oak mill work and refinished it. We were restoring the house to its original 1880's décor and glory, which included a large period wood burning enameled cook stove / oven we bought for the kitchen.
Our dream was to furnish the house with Victorian era antiques, so when someone walked in it would be like stepping back in history. We spent a lot of time at antique auctions in North Dakota and Minnesota looking for furniture and period accessories, and I happened on an old oak wood wall crank style phone that was the perfect accent for our large country style kitchen.
As a kid I was interested in electronics and intrigued by telephones. For a junior high science fair project one year I built a hands free speaker phone in a walnut case with a brushed stainless steel face, using a dial and network scavenged from a Princes phone. I designed the amplified voice activated electronics and built the circuit board from components I bought at a local electronics store.
A current model phone on the wall in our kitchen would destroy the look of our Victorian décor, so I took the original electronics out of the antique wood phone and replaced them with a modern network from a newer phone I cannibalized. The front of the phone hinged open and I hid the touch tone pad inside mounted behind a wood face plate that covered the electronics.
It became quite a conversation piece when guests would ask to use the phone and I'd point them to the antique one on the wall. The response usually went something like: “this is fantastic"…"I've never seen anything like it"…"have you ever thought of making and selling them?"ť That's the last thing an addicted to business entrepreneurial motivated person like me needs to hear!
The telecommunications industry had just started going through deregulation, which allowed people to buy their phone, versus leasing it from the utility company. As a woodworker and a guy with a phone fascination I decided to run an ad to see what kind of interest I'd generate, so I put an 1/8th page ad with a picture of the phone in the back of Victorian Homes Magazine and within weeks was buried with inquiries.
I wasn't prepared for this large a response and mailed them all postcards telling them the ad was a test to determine interest and to “Stay Tuned". Having experience with advertising I think if there is anything I'd learned that's an absolute fact, is there are no absolute facts in advertising! Every ad is a new test to determine marketability and an experiment to refine response and sales ratios.
The response from this ad began an investigation on my part to determine feasibility of manufacturing phones and marketing them. I knew I had the marketing skills, and prior to working out of the Classic Roadsters facility manufacturing had always been an enigma to me. But, I'd seen enough of the process there that I believed I could use this knowledge to make it work.
The numbers had to work on paper first, so I started identifying the parts and researching sources and costs. I began with the electronics, which included the electronic network, touch tone pad, hook switch, receiver and transmitter capsules. I located a company named Comdial that manufactured business telephones in the US who was willing to sell me all of these as brand new components.
I next had to identify costs on parts we'd have to produce our self, but I first needed to come up with physical designs. In my research I'd identified a collector that had tens of thousands of antique phones stored in a warehouse. I flew out and spent a weekend with him educating myself on old designs and determined which ones may be marketable as reproductions.
His collection filled a 100K sq. ft. building and in addition to telephones he had acquired all the tooling, fixtures, jigs and machinery from the 1890's manufacturing plant of the Kellogg Switchboard & Supply Company, which had been located in Chicago. I ended up buying 10 different original phones from him and discussed purchasing some of his old Kellogg manufacturing equipment.
His company also sold refurbished antique phones. He was in as much need as I for a source of reproduction parts of the outer hardware, which included bell brackets and bells for the outside case, the bell shaped bakelite handset, mouthpiece, the outer transmitter arm, cup, crank, and faceplate, etc., so we collaborated on a potential joint project to produce these using his Kellogg tooling.
Still working with Classic Roadsters I was not yet determined I was going to pursue this venture. I needed to make the outer oak cases of the models we were going to reproduce to do labor and raw material analysis to determine costs before committing, so I bought one of this collector's machines the Kellogg factory used to make the finger jointed corners in the phone's wood boxes.
I installed it in my home wood shop and began the process of reproducing wood cases for each of the 10 phones I'd selected. From information gathered I had all the material and labor costs on finished product to do a financial analysis. I compiled them into a profit / loss spreadsheet with cash flow to determine required selling price, plus startup capital requirements and the numbers worked.
I wasn't 100% sure where the market was and assumed it would be people like myself who were looking for a period phone to match their décor. Another market may be wood, electronics, and hardware kits for the guy that liked working with his hands. To find out I recruited a photographer and we shot pictures of all my prototype phones so I had something to send out and test the waters.
From this I received serious inquiries by both Spiegel and the Yield House catalog companies who were ready to place immediate orders. The hobbyist market was something I'd have to run ads for in a couple do-it-yourself magazines to determine response and sales ratios. With response from just these home décor retail catalog companies alone I had sufficient orders to make it work.
I left Classic Roadsters and on July 1st 1984 set up a corporation called Dakota Woodworks. Inc., and invested $40K into raw materials, components inventory, and equipment. I hired several local farm boys that were good wood workers and put them in my garage / shop making oak cases using designs the two catalog companies sent purchase orders for, which was in excess of 400 phones.
I turned my basement into a production area, which was 1,900 sq. ft. with 5 rooms. I setup one of the rooms for doing the staining of the wood cases and another where I installed a spray booth for shooting lacquer. I hired local farm wives to do the assembly, testing, packaging, and shipping in the main room, had a gal running the office out of the laundry / furnace room, and we had a storage room.
I contracted with a company that manufactured touch tone face plates, which was my first introduction to laminating wood veneers to a substrate and doing the final machining on an automated machine center. The following picture of the touch tone pad attached to one of these face plates shows the veneer to polymer laminating technology, which was state of the art at that time.
With production up and running I started working on expanding sales into other markets. Using pictures we'd taken of the phones I printed a 12 page color catalog that had an order form in it, then ran the following full page ad in Popular Mechanics as a test to see what kind of response and sales ratio we'd get from potential DIY customers. Within weeks we were overwhelmed with catalog requests.
This 1st ad resulted in around 300 sales of kits within about 30 days, which were divided about 50/50 between kits "A" and "B". Kit "A" was a repackaging of our entire phone, disassembled with all the wood parts ready for sanding, stain, and finishing, which included all the hardware and electronics. The customer did the assembly, using instructions and wiring diagram we supplied as seen below.
Kit "B" included the same as Kit "A" minus the wood parts and we supplied the drawings with dimensions along with detailed instructions on how to make the wood case, and a wiring diagram. All 10 of our phones were available as kits with similar directions for assembly and making of the wood case. Of these the “Party Line" was the favorite, so I've used this phone as an example below of what they received.
I'd learned you don't grow a company out of personal investment, but from net revenue generated by sales. I'd also learned not accrue debt, but instead, budget capital expenditures through the use of positive cash flow; for this reason we stayed in the basement garage longer than we should, which you can see in the April 1985 calendar on the wall in the above picture of the assembly area.
When we ran out of room and started using the dining room table to do sub-assemblies and spare bedrooms to stock parts and finished goods Gloria put her foot down, forcing me to find a building. Kindred had an old movie theater that was closed with a vacant former post office next door sharing a common wall. We leased both buildings and cut a door through the wall to make it one facility.
Our number of employees fluctuated based on orders and we had up to 17 people working out of our garage and basement some months. Just prior to the move I hired a general manager with a degree in accounting who was a CPA. He also had a master's degree in Industrial Engineering and was brought on board to run the business so I could focus on marketing and sales.
He was a phenomenal asset who picked up the ball and took over manufacturing and accounting. He started with an analysis of production flow to streamline the process, which included doing time motion studies on labor to find ways to improve. From this we were able to justify an investment to increase productivity and immediately spent around $100K on additional equipment.
So along with our Kellogg Switchboard & Supply Company hauncher that did finger jointed corners in boxes and other existing equipment, we bought multiple spindle drill presses that drilled an entire part at once with dozens of different size holes, installed automated profile and surface sanders, and an overhead router that cut and shaped the parts and did the fine detailing on the outer edges in one single pass.
We also stopped processing oak lumber. Instead we contracted with a mill in Wisconsin to supply square and rectangular panels cut to size and thickness. These were produced by the mill gluing pieces of oak together longitudinally that were too small to sell, which gave them a market for it. It also made the parts dimensionally more stable, and allowed us to manufacture cases with virtually no waste.
With the responsibility of managing people and production on someone else's shoulders, I put 100% of my efforts into new market development. Our kits provided us with the highest gross profit and good positive cash flow, as it was all at retail and prepaid by check or credit card on the front end of the sale, so for this reason my plan involved expanding this type of business.
I started advertising every month in magazines that catered to hobbyists and woodworkers. The response ratio was very consistent each time we ran ads, allowing me to forecast monthly sales predicated on the number of ads we were running. Within a period of less than a year we accumulated a mailing list generated from respondents to these ads that had over 100K names on it.
Using this list we mailed quarterly sales flyers to generate additional orders from people who had not purchased in the initial catalog request mailing. Sales from this also became very predictable and for every 5,000 flyers we mailed we consistently generated 300 sales for kits. The following are some of those ads and a copy of the sale flyer, which was a double sided tri-folded single mailer.
In 1984 deregulation broke up the telecommunication monopolies, which not only gave individuals the freedom to buy their own phone, but dictated that utility companies had to buy from outside manufacturers, versus making their own equipment. Decorator phones, which ours were considered, had become the largest segment of this market and we were in a prime position to expand that part of our business.
Wanting to be a respected manufacturer, my strategy included finding other markets for our completed phones. Sales to catalog companies and a few small telephone utilities we'd picked up were at wholesale with terms of 30 days that sometimes stretched to 90, but these types of customers legitimized our products and I looked for opportunities to expand this business for that reason.
We had also been getting small orders from furniture dealers who had seen our phones in the catalogs. To pursue additional business we designed and built a trade show booth and shipped it to the San Francisco Furniture Market Convention, which is held downtown where thousands of retail furniture dealers go twice a year for a week to make buying commitments with manufacturers.
We took orders that week from several hundred dealers that sold reproduction oak furniture in their stores. We were also approached by manufactures representatives that worked as independent sales contractors who wanted to work for us in exclusive territories calling on furniture retailers. We contracted with a half dozen to represent us throughout the western United States.
Cities like Los Angles, Dallas, Chicago, and High Point North Carolina also have wholesale market conventions where retail furniture dealers converge for a week twice a year to see and make buying decisions for inventory. I started traveling the show circuit to all these markets and established dealers and additional manufactures representatives to cover the entire country.
At the time Spiegel Catalog was our largest single customer and the following are their proposed intentions for purchases over an annual period. These letters were to assist us in planning production related to the necessary capital and cash flow requirements to fund raw material purchases, plan labor, and prepare for any expenditures needed for additional equipment to satisfy their orders.
The following is an article around that time written by the Minnkota Power Cooperative out of Grand Forks North Dakota in their monthly news magazine. These pictures were taken in the old theater / post office we had moved into earlier, when the telephone utility segment of our business was still very small. The advantage of this facility was that we had room to more than quadruple our capacity.
In 1987 the buyer at Spiegel suggested we have a booth at the January Consumer Electronics Show in Las Vegas, as that is where they went with their merchandising team each year to make buying decisions. We'd never shown there, so we rented a 10' X 10' space and with the same booth we used at the Furniture Market Conventions we put our entire completed phone product line on display.
I wasn't anticipating such heavy traffic and had to bring in some of our furniture manufacturers reps and Gloria to help staff the booth. What was driving the traffic was the earlier deregulation of the telecommunications industry, which dictated that telephone utility companies could no longer manufacture their own equipment, but had to buy from outside sources. We were in a perfect position to fill that void.
Most of the visitors to our booth were large utility companies like AT&T and GTE who recently opened chains of “Phone Center Stores" across the country and were looking for inventory to stock them. Prior to deregulation, GTE manufactured their own phones at their subsidiary “Automatic Electric". AT&T who owned Bell, manufactured at a subsidiary they had named “Western Electric".
The utility companies would bring teams of engineers and marketing executives into our booth and we spent hours at luncheons and dinners every day of the week long show discussing our manufacturing capabilities, quality assurance procedures, etc. As a result of these meetings we ended up with orders in hand by the end of the show from most every one of these companies.
GTE, which is now Verizon, approached us with a plan to begin a test market of our product line in a select number of stores. If successful they wanted us to start private labeling our phones with their name on them to go into all their stores across the US. The volumes they were talking about would double our sales in less than a year, which would take significant funding to cash flow.
The phones we were shipping our customers, including utility companies, had Comdial electronics which were very reliable with an ITT network, and were the electronics we originally designed the phones around. GTE wanted to change the network, so we hired a full time electronics engineer and started making our own networks using a GTE schematic laid out on a circuit board of our design.
Most of our outer hardware was made by vendors I contracted with early on in Korea and Taiwan. We also had metal parts being stamped in Grand Forks North Dakota. I began to do costing analysis comparisons on producing all the components for the new models in Taiwan and found a manufacturer there willing to amortize tooling costs on parts who had minimum volume requirements.
As you can see, the advantage of producing in Taiwan wasn't costs after you added tariffs, duty and shipping. In some cases we could produce cheaper here, with the biggest advantage being able to monitor quality first hand right in our own back yard, so the only real advantage was being able to cash flow the growth of the business using someone else's money.
After considerable debate, I made the decision to begin producing and importing the majority of only the wood cases for the completed phones from Taiwan. We did the final assembly, testing, packaging in North Dakota and distributed them from Kindred throughout the US. I also started sourcing some of our electronics components and items like touch tone pads out of Japan.
Our core competencies were in assembly and my move to manufacturing our completed phone wood cases off shore was also done to allow us to focus more on this. I kept the production of our wood cases for our kit phones in-house as a backup in case something went wrong with our Taiwanese supplier, which would leave us unable to produce and ship customer's orders.
We had diversified to the point where there were two very distinct operations under the same roof. One was the kit business, where we were manufacturing high end wood products sold to do-it-yourselfers. The other was an assembly operation of electronic components someone else was manufacturing that we installed into off-shore produced wood cases and did the testing, packaging, and shipping.
Because of this I decided to spin off and form another company that was focused on just the completed phones ready to plug in the wall. We incorporated this new company under the name “Telesense, Inc.", which was more appropriate, and rented office / warehouse space in Chicago where we could ship truckloads of completed phones and redistribute them throughout the US from a more central location.
I started working with GTE engineers at their lab located in Lexington Kentucky to redesign a series of phones specific to utility companies, as there were certain requirements that were universal to just them. One was dual modular plugs on each end of the handset and line cords, the other was putting the touch tone pads on the outside of the case, versus behind doors or tray lids.
I also began identifying new models that would increase our sales. These included a brass candlestick phone and two metal desk models whose designs were styled from phones in the 1920's that we introduced as our new “Speakeasy Collection". The desk phones we chose for this were solid brass and patterned after a Western Electric 201, which we also offered with our French handset.
The following picture is an original 1920's Western Electric 201. All our outer hardware and cases on these were produced to the same specifications as the original and had interchangeable parts including the handsets, which were bakelite with brass trim. These were our first phones to have modular cords with dual plugs at both ends on the line cord going to the wall and the handset.
A fourth new phone we developed was a solid oak modern style desk phone we called the “Saxon", which was produced exclusively for Spiegel. We made the GTE designed network with a round circuit board that had female modular plugs hard mounted on the board and all future completed phones were designed around this network, including our new “Dakota Collection" wood phones.
Competitors of wood decorator phones started appearing on the market, but because of our higher quality and larger production capabilities, our sales grew to include utility companies like Bell (see purchase order) and AT&T. We also expanded our completed phone business to companies like Sears, Wards, JC Penney, Macy's and large national chains of electronics retailers.
Prior to deregulation utility companies had been producing phones meeting MIL-SPEC for electronics manufacturing, and the phones they had been leasing customers were pretty much trouble free in most cases for up to and exceeding 20 years. We also had a low warranty return on our phones, but we'd never had a utility company evaluate them to see how they stood up to this standard.
While GTE was doing their market analysis, a decision was made to do a complete series of testing at their lab in Lexington Kentucky to bring them up to utility company standards that would allow our product to be conformal coded into their system so their individual stores could began placing purchase orders, which were to start in the summer of 1989 in preparation for the Christmas season.
They were subject to severe destructive mechanical and electronic tests to the point of failure. We were given an analysis from these failures to make corrections so they would pass secondary testing. Tests included being dropped a dozen times on cement from 10 feet, freezing them for weeks, hitting them with simulated lighting multiple times, and submerging them under water for days.
The following is the report from this testing and the design fixes we implemented:
In early preparation for purchase orders being released by GTE, which were forth coming based on commitments made by top executives at GTE's corporate headquarters in Dallas, along with other large customers, I had another project I was fully engrossed in, which was to set up and move 100% of the manufacturing on our utility company and other completed phones to Taiwan.
This project began during my earlier research in doing costing analysis comparisons on producing all the components for the new models in Taiwan, where I found a manufacturer there willing to amortize tooling costs on parts who had minimum volume requirements. This seemed to be the perfect solution to cash flow the growth and I entered into a joint venture with this company.
We shared ownership in a new Taiwanese company called Telesense Corp, versus our US based Telesense, Inc., where all expenses and revenue for manufacturing and sales of our completed phones being imported would be split 50/50. A year prior to GTE's testing and redesign, I was also traveling back and forth to Taiwan for months at a time setting up manufacturing there in anticipation of the increase in order volumes.
I was warned by friends and business associates that this decision was not in our best interests, as there was a history of quality issues and trade practices that involved US companies who made this move, which resulted in losing control of their intellectual property, manufacturing, and sales, through being side stepped by Taiwanese joint venture partners and going direct to the end customer.
Anyone who knows me very well will tell you I see the world through rose colored glasses and have difficulty acknowledging the negative side of most situations. I operate under the belief that whatever my mind can conceive I can achieve, and there's a history of charging full speed ahead like a bull in a China shop with blinders on my eyes ignoring the overwhelming odds against me.
For the most part this has been a real asset, but there are times when it's been a huge liability, and in this case I should have heeded the warnings. After getting our off-shore manufacturing up and running I found I was having to fly back and forth to Taiwan to resolve gross quality issues, because my partners were cutting every corner possible in an effort to reduce costs and increase profitability.
Containers of phones would arrive to customers where random sample testing was done to insure conformity to specifications. They found things like the transparent conformal coating not being applied on the network, which inhibited moisture degradation and dielectric breakdown of the circuitry, or cheap ICs that were seconds coming out of the Philippines, versus specified proprietary ones made in Japan.
The following pictures show our Taiwan facilities where we produced the phones, with me overseeing some of the earlier production. Our partner was a company who did in excess of $200 million a year in manufacturing and exporting of a very diverse range of products that included kitchen appliances, wood furniture, electronics, metal stamped and forged goods, lighting and many others way too numerous to list.
The Taiwanese company had also established an office at our Chicago warehouse staffed by their people to manage the importation and redistribution. They had the responsibility of administrating the financial side of our partnership out of that office and were tasked with billing our customers and dispersing checks to our creditors in the US who were responsible for things like shipping.
Telesense, Inc., was also one of those creditors. About 12 months after we began delivering completed phones to our customers I started having difficulty collecting funds owed us under our joint venture contract, and felt my best recourse to resolve these breeches of our agreement was to fly to Taiwan and have a face to face to hammer out a solution to the quality and payment issues in a reasonable one on one dialog.
The Taiwanese company agreed to a meeting in Taipei to go over the list of grievances I'd faxed them. On the flight over, the gentleman who was their Vice President of International Business Development, and involved in our original joint venture negotiations appeared unexpectedly coming down the aisle of the plane and seemed very surprised to see me. I was extremely skeptical of the coincidence.
He told me he'd left the company, but while there he'd authored the plan to defraud me of our intellectual property and knock off our product, which included hijacking our entire customer base. My 1st thought was he'd been planted on the plane to befriend me and pump me for information to find out what I was thinking, and this was a ploy so he could report my response back to my Taiwanese partners.
Seeing my aloof reaction, he further explained he'd been a witness in a multi $million US Federal RICO (racketeering) lawsuit against the company for doing the same thing to several other companies. These included knocking off Weber Grill who they manufactured for, and KERO-SUN Heaters after KERO-SUN lost their original manufacturing partner in Japan over unrelated issues.
His departing words were, “If you don't believe me, call the attorney in Chicago handling the case". My fight arrived in Taipei around 11:00 PM and after getting checked into my hotel I called the lawyer whose number he'd given me. It was around 1:00 AM in Taipei, which was 12:00 PM the previous day in Chicago, and after explaining my situation to the receptionist I was connected instantly.
The attorney informed me he had a $6 million judgement against the Taiwanese company he'd been unable to collect because of difficulty finding their US based assets. Stating that if I knew of any and could assist in getting compensation for his clients he'd help me in whatever capacity he could in resolving my issues, which by that time I'd come to realize were beyond comprehension.
I left the hotel immediately by cab without checking out and went to the airport where I was able to catch the 1st flight back to the US. I chose San Francisco as my destination as I had family there and knew it was a good place to hole up while I waited for the reaction of my Taiwanese partners when I didn't show for our meeting, and their discovery that I'd left the country, which took several days.
The events that followed over the next month involved a Federal Court sanctioned raid by US Marshals and INS, which I participated in, to seize the Chicago warehouse assets and arrest the Taiwanese illegal aliens. In theory these assets were jointly owned by my company and the Taiwanese. The other valuable asset acquired was records showing accounts receivable, which in theory were also jointly owned.
We found documentation there showing they'd put the US registration of Telesence Corp into the names of trusted employees, so there was no paper trail pointing back to the known principals, making it obvious they were trying to protect their assets from seizure in a judgement from the inception, In short, the inventory and receivables assets belonged to third parties and we had no legal right to them.
To assume one could use the Taiwanese justice system to resolve issues like this is wishful thinking. When former President Nixon established trade relations with Mainland China in 1972, the US withdrew their recognition of Taiwan as a sovereign nation and took the position that Taiwan was the possession of China. As a result there is no US Embassy in Taiwan to assist US Citizen's in matters like this.
Companies like the one I was involved with are heavily subsidized by the Taiwanese Government, and if you understand the fine print regarding who you're really in partnership with there in a joint venture it's the Government. Taiwanese joint ventures are not governed according to a Western model, and a suit against the Taiwanese Government is not one you're going to win.
To gain control of the financial assets we set up a trust administrated by my attorney and billed the customers who had outstanding invoices with Telesense Corp and diverted the receivables into a Telesense, Inc account under my attorney's control, but because the issue of who legally owned them was in question we couldn't touch them. This move literally resulted in death threats by the Taiwanese.
The FBI got involved and came knocking on my door resulting from the Taiwanese reporting us in a larceny scheme when we redirected the funds. Upon understanding the events leading up to this and the death threats no charges were filed. The FBI then began monitoring our phones and providing 24 hour surveillance and security protection so I could work in safety to salvage the business.
Phones in the Chicago warehouse were destine for GTE, Bell, ATT, retail department store chains, electronic mass merchandisers, QVC and Home Shopping Network for Christmas inventories. To regain control of our customer base I met each one giving assurances we'd be back up and running in the US after Christmas. Their only recourse that close to the holiday was to fill the void with competitor's products.
The following letter to GTE is in reference to one of these meetings:
After months of legal wrangling, the court determined we had no claim to the assets and awarded them to the Chicago based attorney's clients. This attorney's original plan was to sell the inventory to our customers without compensating us, but with competition stepping in to fill the void when we were unable to deliver, it was auctioned off to the surplus market for pennies on the dollar and we got nothing.
I was in denial to the fact that this segment of the business was lost and no longer a viable opportunity with competition now being fully entrenched with our customers, and I became obsessively driven over the next six months in a full time effort to find a financial partner to help fund the cash requirements for Telesense's reentrance into the completed phone market with no success.
What was driving this obsession wasn't profitability or good cash flow, as this segment of our business had the lowest margins with receivables that could stretch 90 days; instead it was my pride and the ego income I'd derived from seeing them for sale in major department store's electronics section, or phone center stores in a mall, or watching TV and seeing them on the Home Shopping Network, or QVC.
King Solomon warns in Proverbs that: “Pride leads to disgrace, but with humility comes wisdom", and, “In the blink of an eye wealth disappears, for it will sprout wings and fly away". In hindsight what I should have been directing my efforts on was the formula of our humble start, going back to the basics using our kit business and still intact North Dakota manufacturing operation as a spring board to recover.
Kits were highly profitable with positive cash flow from prepaid sales, but that part of our business had suffered serious neglect with my attention solely focused on these other problems. With attorney's fees and other liabilities we'd incurred looming, and overhead continuing to accrue on a daily basis with insufficient income from kit sales to cover it, we became insolvent and filed for bankruptcy.
Any financial gains I'd made from previous adventures were lost and I started looking for an opportunity where I could use my marketing, product development, and manufacturing experience to make someone else money. Accepting a Director of Marketing position with a respected company in the forest products industry who's annual revenues exceeded $20 million, stability came back into our lives and I was off on a new adventure.