FTC Probe Hinders Traditional’s Sale of Securities

Traditional Industries runs a profitable business of packaging cameras, film and other photographic accessories and selling the kits directly to consumers, particularly newlyweds and new parents.

But Traditional’s attempt to raise $40 million by packaging some receivables--or money owed to it by customers--into securities and selling them to investors has run into a problem. And the problem is keeping down Traditional’s stock price, analysts say.

About two years ago, the Federal Trade Commission began complaining that a couple of Traditional’s sales practices were misleading and improper, the company said. Since then, the Agoura Hills company, which denies any wrongdoing, has been negotiating with the FTC to settle the matter. But the case remains unresolved.

As a result, Traditional has delayed its plan to sell the receivables-backed securities until the issue is cleared up. The sale would help bolster the company’s weak cash position.

“People are having a wait-and-see attitude” toward the sale, “and that depresses the stock,” said Traditional Chairman Arland D. Dunn. The stock, which stood at $13 a share a year ago, closed Monday at $7.75 in over-the-counter trading.

Photo Kits

Traditional, with sales of $47.1 million in the fiscal year that ended June 30, uses about 1,100 independent salespeople in 47 states to sell its photographic kits, which include camera, film, photo albums and developing, and cost between $300 and $1,600. About 97% of its customers buy the kits on installment credit, much as if they were using a credit card.

The funds customers owe to Traditional are its accounts receivable. Traditional’s plan is to sell receivables-backed securities to investors. As customers pay their bills, Traditional will take part of the proceeds and pass along the remaining money to the investors as interest on those securities.

The sale would benefit Traditional in a couple of ways. Because the company extends credit to most of its customers and because it has been growing rapidly, Traditional is in constant need of cash. The securities sale would give Traditional an immediate cash infusion.

The sale would also enable Traditional to raise the money without borrowing at a time when its debt already is relatively high. Traditional’s debt as of Dec. 31 totaled about $37 million, which was 40% higher than its net worth--or the difference between its total assets and total debts, said Geoffrey Dann, an analyst with Smith Barney, Harris Upham.

But the FTC matter, which Traditional disclosed in July, has delayed the sale. Dunn, in a telephone interview, said: “We really feel we’ll have this thing resolved before too long,” but noted that the agency so far has not acted on any of Traditional’s attempts to settle the case.

Dunn said the FTC’s complaints focused on two areas. In the first, the FTC objected to Traditional using the word custom to advertise its picture enlargements when, in fact, some enlargements are simply a standard blowup of a photograph, he said.

“Our industry doesn’t have any problem with the word, but the FTC felt it might be misleading because not all enlargements are customized,” he said. Traditional has changed its order forms to comply with the FTC’s concerns, he said.

“We don’t deny that we use the word custom ; we do deny that it was misleading,” he said.

In the second case, the FTC found that customers who bought Traditional’s kits in motels, as opposed to their homes or the salespeople’s offices, were not being given a three-day cancellation period offered to other customers, Dunn said. All Traditional customers now get three days to cancel orders, he said.

The FTC’s Seattle office started the inquiry about two years ago by investigating American Industries, a Portland, Ore., company that was acquired by Traditional in October, 1986, Dunn said. American Industries also sold photographic packages.

“So when we acquired them, obviously we inherited the investigation,” Dunn said.

A few weeks ago, the case was transferred to the FTC’s Washington offices, he said. But Howard Shapiro, an FTC spokesman in Washington, said the agency as a matter of policy does not comment on whether an investigation is in progress.

There is the prospect that the FTC might also propose fines against Traditional. But Dunn said any fine is “not going to have a forceful, negative impact on the company.”